The Securities and Exchange Commission (SEC) has launched an investigation into the financing activities of the hedge fund Situational Awareness, led by Leopold Aschenbrenner. The U.S. financial regulator has issued formal subpoenas to four Wall Street pillars: Goldman Sachs, JPMorgan, Citigroup and Bank of America. The objective is to secure full transparency regarding transactions and liquidity exchanges between these banking institutions and the fund, particularly during the market turbulence last July that rattled tech stocks.
The fund, which had reached an impressive $20 billion in assets in under two years thanks to an aggressive leverage strategy on artificial intelligence-related stocks, was hit hard by the sector's sudden reversal. To avoid a total collapse, the manager was forced to liquidate the bulk of his positions in an emergency sale to Citadel, an operation carried out at a 10% discount. Since then, Ken Griffin's firm has significantly redistributed these assets into the market, totaling over $4 billion in block trades.
This SEC intervention highlights the systemic risks inherent in the prime brokerage sector. The practice of lending capital in exchange for collateral is a major revenue stream for large banks, yet it creates significant gray areas. The primary issue for authorities is to determine whether financial institutions had a comprehensive view of the fund's total exposure. By diversifying credit sources, a manager can effectively mask their overall leverage—a loophole reminiscent of recent scandals that have undermined market stability.
Beyond general oversight, the SEC is seeking to reconstruct the precise timeline of trades leading up to the emergency sale. The regulator is particularly interested in the conditions of margin calls and communications between the fund and its creditors during those critical days. While no charges have been filed yet, the inquiry underscores an increased desire among authorities to regulate the most opaque credit practices. For its part, Situational Awareness has pledged full cooperation while announcing that it will permanently cease the use of bank leverage for its future strategies in public markets.