Key Takeaways
- • Hedge fund borrowing from banks reached nearly $3.7 trillion by midyear 2026, the highest level in more than a decade and roughly three times the level at the start of the pandemic in 2020, according to the Treasury Department.
- • Situational Awareness, an AI-focused hedge fund founded in 2024 by Leopold Aschenbrenner, nearly collapsed this summer after lenders demanded repayment when AI stocks fell sharply.
- • The fund was forced into a distressed sale of roughly $20 billion in stocks to Citadel at a discount, shrinking from about $45 billion at its July peak to around $10 billion in assets.
- • The SEC subpoenaed Goldman Sachs, JPMorgan, Citigroup and Bank of America for information about their dealings with the fund, while the SEC has proposed easing hedge fund borrowing disclosure rules.
- • The Bank for International Settlements cited the episode as a warning that heavily leveraged forced sellers could trigger a wider market selloff.
Summary
Hedge fund borrowing from banks has reached record levels, with nearly $3.7 trillion outstanding by midyear 2026, according to the Treasury Department as reported by Quartz and The New York Times. The Treasury describes the figure as the largest in more than a decade and roughly three times the level recorded when the pandemic began in 2020. The episode has renewed scrutiny of leverage in equity markets.
Situational Awareness, the AI-focused hedge fund, nearly collapsed this summer. According to The New York Times, founder Leopold Aschenbrenner had never worked at an investment firm before launching the fund in 2024, and the operation employed eight people, only half of whom were dedicated to managing investments. Despite this profile, Goldman Sachs, Bank of America and other major Wall Street banks lent the firm tens of billions of dollars, enabling a concentrated position in AI-related stocks. The firm's executives reportedly pressed multiple lenders to raise leverage from four times to ten times investor capital, citing a banker familiar with the negotiations.
When AI stocks dropped sharply over the summer, lenders demanded repayment. The resulting distressed sale of roughly $20 billion in stocks to Citadel, led by Ken Griffin, was executed at a discount. The fund, which had grown to roughly $45 billion at its July peak, was left with about $10 billion in assets after the sale closed. Around that time, the SEC sent subpoenas to Goldman Sachs, JPMorgan, Citigroup and Bank of America seeking information about their dealings with the firm. Situational Awareness has since grown to 25 employees, including three focused on compliance, and talks with Morgan Stanley over additional borrowing, which had stalled after the meltdown, have resumed, a firm representative said.
Regulators have cited the episode as a broader warning. Frank Smets, who leads economic analysis and statistics at the Bank for International Settlements, said the near failure of the AI-focused fund "served as another reminder of these risks," particularly that heavily leveraged funds forced to sell could trigger a wider selloff. Tyler Gellasch, president of Healthy Markets Association, said "compliance officers and regulators will likely spend years asking how the risks grew so quickly." Leverage has coincided with a strong equity rally, with the S&P 500 logging 27 all-time closing highs this year and returning 158 percent on a total-return basis since 2020.
The SEC has proposed easing some reporting rules requiring hedge funds to disclose borrowing levels to regulators. Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, said the move would "make these already shadowy markets even more opaque."
Situational Awareness, the AI-focused hedge fund, nearly collapsed this summer. According to The New York Times, founder Leopold Aschenbrenner had never worked at an investment firm before launching the fund in 2024, and the operation employed eight people, only half of whom were dedicated to managing investments. Despite this profile, Goldman Sachs, Bank of America and other major Wall Street banks lent the firm tens of billions of dollars, enabling a concentrated position in AI-related stocks. The firm's executives reportedly pressed multiple lenders to raise leverage from four times to ten times investor capital, citing a banker familiar with the negotiations.
When AI stocks dropped sharply over the summer, lenders demanded repayment. The resulting distressed sale of roughly $20 billion in stocks to Citadel, led by Ken Griffin, was executed at a discount. The fund, which had grown to roughly $45 billion at its July peak, was left with about $10 billion in assets after the sale closed. Around that time, the SEC sent subpoenas to Goldman Sachs, JPMorgan, Citigroup and Bank of America seeking information about their dealings with the firm. Situational Awareness has since grown to 25 employees, including three focused on compliance, and talks with Morgan Stanley over additional borrowing, which had stalled after the meltdown, have resumed, a firm representative said.
Regulators have cited the episode as a broader warning. Frank Smets, who leads economic analysis and statistics at the Bank for International Settlements, said the near failure of the AI-focused fund "served as another reminder of these risks," particularly that heavily leveraged funds forced to sell could trigger a wider selloff. Tyler Gellasch, president of Healthy Markets Association, said "compliance officers and regulators will likely spend years asking how the risks grew so quickly." Leverage has coincided with a strong equity rally, with the S&P 500 logging 27 all-time closing highs this year and returning 158 percent on a total-return basis since 2020.
The SEC has proposed easing some reporting rules requiring hedge funds to disclose borrowing levels to regulators. Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, said the move would "make these already shadowy markets even more opaque."
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