Organized & Compiled by Shenchao TechFlow
Hosts: John Coogan & Jordi Hays
Guest: Martin Shkreli (Shkreli previously worked at Cramer’s hedge fund, later founded multiple hedge funds including Elea Capital and MSMB Capital, as well as biopharmaceutical companies Retrophin and Turing Pharmaceuticals, and has personally experienced the 2000 dot-com bubble and multiple institutional liquidation cycles)
Key Issues: Review of the Situational Awareness Fund (SALP) liquidity crisis, hedge fund leverage mechanisms, prime broker forced liquidation procedures, market hunting psychology
Source: TBPN Podcast — "Martin Shkreli Breaks Down the Collapse of Situational Awareness"
Broadcast date: July 30, 2026
Disclosure: Martin Shkreli is currently an active individual investor who owns positions in certain AI-related stocks (including Kosha in Japan). He also operates a pharmaceutical technology company, DrugDash, and runs a paid subscription service. The views expressed in this episode are based on his Wall Street trading experience, and may align with his personal investment positions when specific securities are mentioned.
By the way, Martin Shkreli is the so-called "financial brat" who single-handedly shook up the U.S. pharmaceutical industry and Wall Street, convicted of manipulating pharmaceutical stock prices and sentenced to seven years in prison. Precisely because he himself is the "grandmaster" of leveraging, short-selling, and clashing with regulators, his analysis of the $45 billion AI hedge fund collapse offers a razor-sharp perspective and a deeper understanding of Wall Street’s jungle rules than any ordinary financial commentator.
Key Points Summary
- The Situational Awareness fund used approximately 4x leverage, meaning a 25% drawdown would be sufficient to reduce the fund's net asset value to zero; when the market value of its positions fell from $120 billion to approximately $90 billion, the $3.5 billion in principal may have been reduced to $500 million, triggering a forced liquidation by the prime broker.
- Market participants began "shooting against the fund" as early as Monday and Tuesday this week—selling positions overlapping with the target fund and shorting its held assets to actively accelerate its collapse, a classic Darwinian move on Wall Street.
- The three leading bidders for the assets were Jane Street, Millennium, and Citadel, with Citadel ultimately winning; Shkreli believes Citadel could realize an immediate paper gain of $3 to $4 billion if it can smoothly absorb these positions.
- Shkreli believes that macro narratives—such as wars, oil prices, open-source anxiety, and capital spending peaks by hyperscale cloud providers—are all noise; what truly determines price is the buying and selling intent of the marginal 5% of traders and their leverage multiples.
- Leopold previously worked at FTX until the day before its collapse and should have learned risk management lessons, yet he re-entered the market less than two years later with higher leverage and greater concentration; additionally, he broke the hedge fund convention of avoiding private equity by heavily investing in illiquid assets such as Anthropic.
- A large New York-based fund of funds once rejected Leopold during fundraising, citing "lack of experience and inability to invest"; later, Leopold achieved a 20x return, leaving the fund embarrassed—but after this round’s liquidation, they were “in some ways proven right.”
- Shkreli uses the Kelly Criterion to demonstrate that even with a 60/40 edge in win probability, if position size exceeds the optimal scale by 2 to 10 times, simulations always result in zero.
Summary of Key Insights
I discussed with my friends well-known liquidation events caused by liquidity issues, such as Long-Term Capital Management, Amaranth, and others. This Situational Awareness incident certainly ranks among them.
Once the market learns that a fund must be liquidated, the most advantageous strategy for others is to sell their overlapping positions and begin shorting everything the fund holds. It’s harsh and Darwinian, but very common on Wall Street.
Those aren’t the core factors. What truly matters is the buying and selling momentum of buyers and sellers. Smart money enters early and keeps buying as prices rise; later, less informed participants see the gains and rush in. The weakest hands typically buy at the top and are the first to panic and sell. Every bubble follows the same pattern: euphoria, a peak, then everyone panics at once. Fundamentals barely matter at this point.
Ken wants to be the person everyone turns to when things go wrong. Buffett is older and doesn’t want to take on this role. But Citadel did exactly that during Amaranth’s collapse.
Hedge funds wearing venture capital hats to invest in private equity usually end up poorly. Looking back over the next 50 years of hedge fund history, very few have been able to excel at both.
Leopold didn’t do anything wrong—the leverage level predetermined the outcome. With even a slight market movement, he was bound to be liquidated; there was no other possible result. Unfortunately.
If you're going to hold these stocks, you must be prepared to hold them even as they drop to a P/E ratio of 2 or even 1 without flinching. The only entity in the world capable of holding $100 billion without batting an eye is probably a firm like Citadel.
Body
I. Opening: The Most Wild Month in Wall Street History
At the start of the podcast, Shkreli bluntly stated that the past 24 hours were among the most chaotic experiences of his personal investment career. He mentioned that he and colleagues in the industry had begun hearing rumors about issues with the Situational Awareness fund since mid-last week, with the situation becoming clearer by Thursday night and Friday morning. He compared this event to famous liquidity-driven collapses such as Long-Term Capital Management (LTCM) and Amaranth, calling it "definitely among the top."
What impressed him was how well the fund handled confidentiality. However, market-savvy players, particularly large counterparties, may have begun positioning themselves as early as Monday or Tuesday this week. He quoted his former employer Cramer, who called this “shooting against a fund”—meaning that when a fund is forced to liquidate, the optimal strategy for others is to sell positions overlapping with the fund’s holdings while simultaneously shorting everything it owns. It’s not a moral issue; it’s pure game theory.
II. Root Cause: Not war, not oil—it's marginal traders and leverage
The host launched a series of macro narratives to test him: a U.S.-Iran war? Oil prices? Open-source AI anxiety? Capital expenditures by hyperscale cloud providers hitting a ceiling? Shkreli dismissed each one.
Those aren’t the core. What really matters is the buying and selling tendencies of buyers and sellers.” He described the classic psychology of a bubble: smart money enters first and keeps buying as prices rise; later entrants, seeing 400% returns, fear missing out and follow suit; the weakest hands buy at the top and are the first to panic-sell. Shkreli joked, “People like me start buying near the top. I thought the memory was great, and the bottleneck trades were awesome.”
He emphasized that at such moments, fundamentals barely matter, as only the marginal 5% of traders determine the price. The problem is precisely that these 5% are operating with 3 to 4 times leverage. According to market rumors, SALP used approximately 4 times leverage, and “a 25% drawdown can knock you out.”
The Mathematics of 3x to 4x Leverage: From $45 Billion to $500 Million
Shkreli used a set of simplified numbers to help the audience understand the harshness of leverage. Assuming the fund had $35 billion in principal, plus approximately $10 billion in Anthropic private equity (based on understanding at the time), the book value of principal was about $45 billion. Operating with 4x leverage meant the total market value of positions was approximately $120 billion.
When the market value of the position declines by 25%, reducing the total position value from $120 billion to approximately $90 billion, the book value drops from $35 billion to around $5 billion—or even lower. Once net value approaches or falls below zero, prime brokers (such as Goldman Sachs and Bank of America) step in. They are not there to rescue you; they are there to take control of the assets and sell them as quickly as possible, because "their board would rather lock in a $1 billion loss than risk a $5 billion loss."
Rumors suggest that Leopold urgently contacted around ten institutions over the weekend in an attempt to sell Anthropic equity to bolster liquidity, at a valuation of approximately $1.1 trillion for Anthropic. However, ultimate control over the public book ultimately passed to the prime broker, with Citadel stepping in as the buyer and acquiring the position at a collective discount.
IV. The Hunting Mechanism: When the Market Smells Blood
Shkreli detailed the practical difficulties of liquidating large positions. You can't handle a $100 billion position by simply clicking "sell" on Robinhood.
The standard process involves calling Goldman Sachs, which acts as an intermediary to find a buyer. However, the intermediary is obligated to "advertise" the order to the market by disclosing its market maker identifier (e.g., GSCO) and the asset being sold. Once this information is released, Wall Street immediately knows that "a large seller is in the market."
At this point, several things happen: smaller funds may secretly short the asset, trying to position themselves in front of the large seller; genuine institutional buyers also hesitate, thinking, “If his position is truly massive, I need to proceed cautiously.” The holder list isn’t that long—you call Fidelity, you call index funds, and they all say they didn’t sell—“then it can only be him.”
Even more brutal is that when the market confirms someone must sell $100 billion, “there will be trillions standing in their way, just waiting to see them beg and cry.” This isn’t just Leopold’s $10 billion multiplied by five to ten times—it’s the total amount of capital in the market engaged in the same trade. Shkreli believes that although the most intense liquidation phase may be over, over the coming weeks, more funds will be revealed to have suffered losses of 30% to 40%.
Five: Citadel’s Entry: Ken Griffin Wants to Be "The One"
During the asset bidding phase, Jane Street, Millennium, and Citadel were brought into a closed circle. Shkreli heard that Millennium did submit a bid, but Citadel offered better terms.
He assessed Ken Griffin’s motivation: “Ken wants to be the person everyone turns to when things go wrong.” Buffett, being older, doesn’t want to deal with these messes, but Citadel has played a similar role during past crises such as the Amaranth natural gas collapse and the Enron downfall. It’s an extremely expensive brand investment—“maybe used only once every ten years, but one time can earn you $5 to $10 billion for free.”
Citadel still achieved a slight positive return this month, and Shkreli believes this is likely because they implemented hedging strategies. More importantly, as a major client of the prime broker, Citadel has access to vast amounts of global trading data, giving it a natural advantage in information and execution speed.
Six: Prime brokers are not your teammates
Shkreli explained the prime broker business model: they profit from the spread on financing. If you trade with 4x leverage, the prime broker could earn 400 to 800 basis points in "free income." That’s why they love leverage.
However, the risk department within the prime broker is monitoring a different set of metrics: excessive concentration is unacceptable, and overly large short positions are also problematic (as the GameStop lesson taught). What troubles them most is private equity. Hedge funds engaging in venture capital, in Shkreli’s view, is a "death kiss." East Coast hedge funds investing in private equity typically can’t compete with West Coast firms dedicated solely to venture capital.
Leopold’s situation is particularly tricky: Anthropic is a private company, and he is as close to it as possible—his fiancée is the chief of staff to Anthropic’s CEO, Dario Amodei. Although Anthropic’s demand has surged 100-fold over the past six months, when cash is needed, “you can’t just hit the sell button.”
Rumors say someone patted Leopold on the shoulder on Monday or Tuesday saying, "Your margin looks a bit thin—can you top it up by a few billion?" But things moved too quickly; there was simply no time.
Seven: Can Leopold make a comeback?
The host asked Leopold whether he could still rebuild his career. Shkreli believed it was entirely possible.
He uses Peter Thiel as an example: Thiel’s macro hedge fund, Clarium Capital, performed poorly in its later years, but he later pivoted to found Founders Fund, becoming one of the most successful VCs of all time, and even relaunched Thiel Macro. Shkreli said Leopold could take a few years to rebuild, learn from his mistakes—“no one denies he’s a genius.”
But this process inevitably involves humiliation. Two months ago, it was the world’s largest hedge fund; two months later, it was forced to liquidate its positions—“it was an extremely devastating moment.” Additionally, clawback provisions in the hedge fund industry may complicate matters further. Many institutions now require fund managers to return previously earned fees—2% management fees and 20% performance incentives—in the event of significant drawdowns.
Shkreli also noted that Leopold’s delayed 13F filing once sparked market speculation that “everyone assumed he had struck a confidentiality agreement, but it turned out he simply hadn’t gotten around to it.” This indirectly highlights the immaturity of a young fund in terms of operations and communication.
Eight: A Lesson for Everyone: Kelly Criterion and Position Sizing
At the end of the podcast, Shkreli shared his own position simulator based on the Kelly Criterion.
The Kelly Criterion shows that if your edge is 55%, the optimal position size is 10% of your capital. Yet in reality, nearly every trader bets 2 to 10 times the optimal size. He demonstrates with a simulator: even with a 60/40 edge, overbetting will always lead to ruin.
He recalled that after leaving Tiger Cub, he had the opportunity to observe a low-profile fund manager who had worked for many years at SAC Capital (now Point72). This manager oversaw $300 to $400 million, nearly all of which was his own money, with 80% to 90% of the capital consistently held in cash, making only small trades and never recording a losing quarter in over 20 years, achieving annualized returns of 20% to 30%.
The first thing I did after getting the capital was to go on 8x leverage. The dumbest thing in the world.
Shkreli said that, at its core, it’s a psychological issue. Hedge funds are the most glamorous, agonizing, and terrifying business in the world. You think you’re the master of the universe, but in reality, you wake up at 3 a.m. to check South Korean stock prices, then wake up again at 6 a.m. to see what happened in the world—“you’re basically doing nothing but playing a high-stakes, crazy game of poker.”