The U.S. Securities and Exchange Commission is reportedly issuing subpoenas to several major Wall Street banks to investigate last month’s near-collapse of the AI-themed hedge fund Situational Awareness. Regulators seek details on the fund’s trading activities, leverage usage, and communications with its financing banks.
In July, positions were forcibly closed following the tech stock pullback.
This investigation followed the sharp decline in tech stocks in July. Situational Awareness was severely impacted during that sell-off, with its assets under management reportedly plummeting from approximately $45 billion to around $10 billion.
The fund, led by former OpenAI researcher Leopold Aschenbrenner, is primarily invested in publicly traded stocks, with a concentrated portfolio and high leverage. Reports indicate its holdings include SK Hynix and CoreWeave. After losses expanded, multiple prime brokers issued margin calls, forcing the fund to significantly reduce its positions.
The subpoena involves major financing institutions such as Goldman Sachs.
According to Reuters, citing sources familiar with the matter, institutions that received subpoenas include Goldman Sachs, JPMorgan Chase, Citibank, and Bank of America. Regulators are seeking information from these banks related to the fund’s trading, financing, and communications.
Goldman Sachs declined to comment. CNBC said it reached out to JPMorgan Chase, Citigroup, and Bank of America for comment.
Citadel discounts and takes over part of the positions
After the fund was forced to liquidate, Ken Griffin’s multi-strategy hedge fund, Citadel, purchased the related positions at a discount, reportedly around 10%. In a letter to investors last Friday, Griffin stated that Citadel has since reduced its exposure to this portfolio by approximately 80%.
The report also stated that SK Hynix and CoreWeave have since rebounded.
Regulatory investigations do not necessarily lead to enforcement actions.
The report states that the SEC's request for information does not mean that the bank or Situational Awareness has been determined to have engaged in any wrongdoing. Such investigations may also conclude without any further enforcement action.
Situational Awareness stated that it is not surprising for regulators to review funds with high visibility, significant returns, or substantial drawdowns. The fund noted that it operates within a highly regulated industry and will fully comply with regulatory requirements.