Andrew here. We told you on Thursday to watch for fallout from Situational Awareness, the high-flying hedge fund that bet heavily \u2014 and with enormous leverage \u2014 on the artificial intelligence boom.<\/p>\n
Well, after a wave of margin calls, the fund was forced into a fire sale on Thursday, offloading its public stock portfolio to Ken Griffin\u2019s Citadel. It is a playbook Griffin has executed repeatedly during market distress \u2014 remember Melvin Capital and the GameStop frenzy in 2021?<\/p>\n
We\u2019ve got a lot more below, but the sheer speed of the implosion has Wall Street searching for parallels. Some have compared the Situational Awareness woes to the market ructions in 1998 that led to the collapse of Long-Term Capital Management (LTCM), or to the failure of Archegos Capital Management.<\/p>\n
I reached out to Roger Lowenstein, author of the book \u201cWhen Genius Failed,\u201d to ask about the LTCM comparison.<\/p>\n
\u201cIt depends on the extent of their debt and the extent to which other firms copy-catted their investments. LTCM, as you\u2019ll recall, had a ton of debt, and its values tanked as imitative firms sensed their duress and bailed out ahead of it or with it,\u201d he said. \u201cTo me it feels a little more like the dot-coms \u2014 huge equity investments in a new thing that no one can value with any hope of precision.\u201d<\/p>\n
An A.I. oracle gets dinged <\/p>\n
The volatile artificial intelligence trade has burned plenty of investors. Few are bigger than Situational Awareness, a buzzy hedge fund started two years ago by Leopold Aschenbrenner, a former OpenAI researcher with no previous investment experience.<\/p>\n
The fallout on Friday seems to be contained. The fund is still operating, but its rapid fall \u2014 its portfolio of mostly A.I. bets fell roughly 67 percent this month<\/a>, according to The Wall Street Journal \u2014 has rattled the investment community.<\/p>\n \u201cWe let you down this month,\u201d the fund wrote in a letter to clients, according to The Journal, citing an unidentified source.<\/p>\n Recap: On Thursday, Situational Awareness sold off a chunk of its holdings at a discount to Citadel, Ken Griffin\u2019s hedge fund, to shore up funding and cover its margin calls amid a wider sell-off in A.I. and chips stocks. All told, the fund sought to raise more than $10 billion<\/a>, Rob Copeland of The Times reported.<\/p>\n The firm also made emergency calls to Sequoia and Greenoaks<\/a> to see if they would buy its stakes in private companies, according to Bloomberg, citing unidentified sources. Those talks ended, however, after Situational Awareness cinched the Citadel transaction, Bloomberg added.<\/p>\n A juicy tidbit: The fund had weighed selling its $3.5 billion stake in Anthropic, the A.I. lab expected to go public later this year, to those firms before ending the talks, The Journal reports.<\/p>\n Despite hefty losses this month, Situational Awareness informed clients that it was up about 80 percent this year, The Journal reported.<\/p>\n Who is Aschenbrenner? After stints at a philanthropic organization tied to Sam Bankman-Fried\u2019s defunct FTX and at OpenAI, Aschenbrenner caught the attention of Wall Street and Silicon Valley. Two years ago, he published a blue-sky essay titled \u201cSituational Awareness\u201d predicting how A.I., and especially the more advanced artificial general intelligence, would transform society and the economy.<\/p>\n That earned him the reputation as the Nostradamus of A.I.<\/p>\n Big names in tech, including the Stripe founders, Patrick and John Collison, and Nat Friedman, a former C.E.O. of GitHub, then helped him raise money to start the hedge fund.<\/p>\n What\u2019s next? The A.I. trade is rebounding on Friday \u2014 thanks in part to Citadel\u2019s lifeline<\/a> calming the market \u2014 a sign that investors aren\u2019t too spooked about Situational Awareness. But Aschenbrenner\u2019s investment advice from a 2024 podcast hangs in the air.<\/p>\n \u201cObviously not blowing up is sort of like task number one and two<\/a>, or whatever,\u201d he said then, according to The Financial Times.<\/p>\n HERE\u2019S WHAT\u2019S HAPPENING <\/p>\n Anthropic reports its models went rogue during tests. The artificial intelligence lab revealed that several of its most powerful models penetrated the systems<\/a> of three outside organizations, days after its rival, OpenAI, announced a similar breakout during testing. Also in A.I., a group of banks led by Morgan Stanley is in discussions to lend $15 billion to build a data center for Anthropic in Texas<\/a>, backed by Google, The Wall Street Journal reports, citing unidentified sources.<\/p>\n Shares in Elon Musk\u2019s Tesla rise on a report of the possible sale of its China business. The move would pave the way for the electric vehicle maker\u2019s potential merger with SpaceX, Musk\u2019s rockets and A.I. company, The Wall Street Journal reports, citing unidentified sources. Tesla stock has risen in premarket trading, even though Musk denied the report<\/a>. Elsewhere, Musk plans to spend at least $100 million to help Republican candidates<\/a> in the midterm elections, The Times reports.<\/p>\n New York sues Kalshi. The state\u2019s attorney general, Letitia James, argued in the filing that the prediction market platform violated the state\u2019s gambling laws against illegal gambling<\/a> because it failed to obtain a Gaming Commission license. Kalshi responded that states \u201ccan\u2019t just shut down a federally licensed exchange.\u201d The Commodity Futures Trading Commission, the federal regulator that oversees prediction markets, filed a motion to stop New York\u2019s enforcement action.<\/p>\n Boycott threats put FIFA at risk. UEFA, the European soccer association that includes the winners of five of the past six World Cups, said it would boycott FIFA tournaments<\/a> until its president, Gianni Infantino, rescinds his plan to sell a piece of FIFA\u2019s commercial operations to private investors. Concacaf<\/a>, which represents national teams in North and Central America, and the Asian Football Federation<\/a> have also rejected Infantino\u2019s money-raising plan, potentially threatening his grip on power.<\/p>\n Cloud clout <\/p>\n Tech stocks are rallying again on Friday, easing fears of an artificial intelligence bubble.<\/p>\n The catalyst is Amazon, whose second-quarter results solidly beat<\/a> Wall Street expectations.<\/p>\n Taking stock: Now that earnings reports are in from the four biggest hyperscalers \u2014 Google\u2019s Alphabet, Microsoft, Meta and Amazon \u2014 an investment thesis is beginning to crystallize: as long as you have a humming cloud business, investors are willing to look past huge A.I. spending.<\/p>\n Drilling down:<\/p>\n Revenue at Amazon Web Services \u2014 its cloud business \u2014 jumped 37 percent, its fastest growth in four years<\/a>, as its investments in data centers are generating significant A.I. income.<\/p>\n Shares are up roughly 11 percent in premarket trading, as investors cheer the cloud results. Microsoft, which reported robust cloud revenues on Wednesday, saw its shares rally on Thursday, adding a record-shattering $450 billion<\/a> to its market capitalization.<\/p>\n Amazon raised its projection for capital expenditures<\/a> this year to $220 billion, from $200 billion. Andy Jassy, Amazon\u2019s C.E.O., said it was aggressively spending to meet soaring cloud demand.<\/p>\n Investors seem comfortable with big capex spending \u2014 if it generates returns. They were willing to look past Amazon\u2019s disclosure that huge outlays would make it cash-flow negative, on a trailing 12-month basis by this quarter\u2019s end. Investors weren\u2019t that kind to Alphabet<\/a> when it reported something similar last week.<\/p>\n Alphabet and Amazon cloud revenues are getting a boost from a common source: Anthropic. The A.I. lab has committed to spending more than $100 billion over 10 years<\/a> on AWS services.<\/p>\n It\u2019s not all great news in tech land. Apple\u2019s shares fell more than 7 percent in premarket trading after it projected weaker-than-expected revenue in the current quarter, as a chips crunch weighs<\/a> on its core hardware business.<\/p>\n Video of the week<\/p>\n Breaking Down the New Threat to Oil Supplies <\/p>\n More volatile trade has pushed oil prices higher on Friday after Saudi Arabia said on Thursday<\/a> that it was forming a coalition<\/a> to protect shipping in the Red Sea. But Brent crude, the international global benchmark is on pace to have climbed roughly 20 percent this month. <\/p>\n Iran continues to keep a tight hold on the key Strait of Hormuz transit way. Saudi Arabia has turned westward to the Red Sea as an alternative route for its exports of crude. But that shipping lane has now been threatened by attacks<\/a> from the Houthis, a Yemeni militia supported by Iran.<\/p>\n Rebecca F. Elliott, who covers the oil industry for The Times, has been reporting on how the Iran war is disrupting global markets. You can watch her breakdown of this latest threat on DealBook\u2019s Instagram page<\/a>.<\/p>\n Talking A.I. with the C.E.O. of Cognizant <\/p>\n Every week, we ask a business leader how they use artificial intelligence. This week, Ravi Kumar, who runs the technology services company Cognizant, told DealBook\u2019s Sarah Kessler that every one of its employees has an \u201cA.I. fluency dashboard.\u201d The interview has been condensed and edited.<\/p>\n How do you personally use A.I.?<\/p>\n My team built an agent that goes into the company\u2019s tribal knowledge \u2014 minutes of meetings, emails, chat messages \u2014 and comes back with patterns: This customer has friction; this sentiment looks bad.<\/p>\n With this tool, I\u2019m able to proactively say, \u201cWe found a friction point in the project we\u2019re delivering. We\u2019re fixing it, but we wanted to let you know.\u201d That\u2019s a very powerful way of changing how you communicate to clients.<\/p>\n What have you told your employees about how you want them to approach A.I.?<\/p>\n We are hiring more graduates this year than last year. If you\u2019re a software engineer joining us out of school, we have a 12-week boot camp where we teach you how to be asynchronous and autonomous. You macro-delegate and you micro-steer. You\u2019re an agent manager. That mind-set is very easy for me to structure at the bottom of the pyramid, because people have never done it a different way.<\/p>\n Do you do anything else to encourage A.I. use?<\/p>\n All 350,000 of our employees have something called an A.I. fluency meter. It tells you the tools you use, how much A.I. is in your flows, your token consumption. And it gives you a composite score. It also gives you a peer score. You double-click, and it\u2019ll tell you how to improve your score.<\/p>\n How are employees supposed to use it? Is it part of their performance reviews?<\/p>\n No, it\u2019s private to you. We won\u2019t see your score. I only get aggregate stats. And that actually takes anxiety out.<\/p>\n THE SPEED READ <\/p>\n Deals<\/p>\n The sandwich maker Jersey Mike\u2019s<\/a> and the women\u2019s fashion retailer Reformation made weak I.P.O. debuts<\/a> as the private-equity-backed consumer companies failed to excite investors. (Bloomberg, FT)<\/p>\n Blue Owl Capital\u2019s private credit division raised $1.8 billion<\/a> in the previous quarter, its least in three years, amid a flood of redemption requests from worried investors. (FT)<\/p>\n Politics, policy and regulation<\/p>\n The Trump administration is weighing charging foreign students enrolled in U.S. universities a $100,000 fee<\/a> to stay in the country to work after graduation. (WSJ)<\/p>\n How some companies and trade groups are gaining tariff exemptions<\/a> by ostensibly cozying up to President Trump. And meet Meredith O\u2019Rourke, Trump\u2019s chief fund-raiser hitting up companies for donations<\/a>. (NYT, WSJ)<\/p>\n Best of the rest<\/p>\n We\u2019d like your feedback! Please email thoughts and suggestions to dealbook@nytimes.com<\/a>.<\/p>\n