SEC probes Wall Street banks after AI hedge fund portfolio plunges 67%

The U.S. Securities and Exchange Commission has launched a formal investigation into Wall Street lending practices following the dramatic collapse of Situational Awareness, a 2024-founded AI-focused hedge fund that experienced a 67% portfolio decline in July 2026. The SEC's inquiry represents a significant regulatory response to the largest blowup in the AI trading sector to date, with subpoenas issued to four major financial institutions: Goldman Sachs, JPMorgan, Citigroup, and Bank of America. These banks served as primary lenders to the hedge fund, and regulators are seeking detailed information on transaction timing, leverage usage, and communications between the fund and its creditors during the crisis period.

Situational Awareness, led by Leopold Aschenbrenner—a former OpenAI researcher whose AI-bullish investment thesis initially attracted substantial investor capital—built its strategy around concentrated exposure to artificial intelligence-related equities. The fund's early returns were substantial, but the investment thesis unraveled rapidly in July when global semiconductor stocks experienced a broad sell-off. The sharp decline in AI equity valuations placed severe pressure on the fund's highly leveraged positions, triggering margin calls from multiple lenders. In an investor letter dated late July, Aschenbrenner disclosed that the portfolio had experienced the 67% loss and stated the fund had "reached a point of permanent impairment of capital that exceeded our tolerance," though he indicated that management had ultimately located a solution.

Rather than face complete liquidation, Situational Awareness sold most of its public equities portfolio to Citadel, which appears to have acquired the distressed positions. This transaction prevented total fund failure but left investors with significantly diminished returns. The SEC's investigation now focuses on the mechanics of the margin calls and potential coordination concerns among lenders during the crisis. Specifically, regulators are examining whether the timing of forced liquidations followed proper procedures and whether communication protocols between the hedge fund and its creditors were appropriately maintained. The four banks under scrutiny have declined to comment, as has the SEC.

The probe underscores growing regulatory scrutiny of leverage dynamics and risk management practices in alternative asset management, particularly in concentrated thematic trades such as AI. For institutional investors, family offices, and hedge fund operators, the investigation may signal enhanced SEC oversight of both lender practices and hedge fund leverage policies, with particular attention to forced liquidation procedures and the potential for conflicted interests when creditors hold significant market positions.