I?m not surprised that a kid who wasn?t even born in the U.S. doesn?t know anything about the history of bubbles. But I am surprised that grown-ups who should have taken the time to study financial history would let a kid manage their money in a clear bubble example of using leverage to magnify risk.

I'm not sure this correctly identifies what went wrong with Situational Awareness. They didn't get blown out of their positions because there was a bubble, or because the trade was a bad trade. Long AI/short conventional software has been a phenomenal trade, and is still up enormously for the year.

Where they went wrong is that they used short-term financing (basically margin loans from banks) for a long-term investment thesis. Situational Awareness' investment thesis is that over the decade from when they first started (2024), AI will grow from virtually nothing to one of the biggest things on earth and it will eat conventional software shops alive. That thesis has been absolutely spot on, which is why SA has performed so spectacularly.

But it's a long-term thesis, and even if it's exactly right there will be short-term volatility over that decade. Which means that a hedge fund manager implementing that thesis also has to know how to manage their exposure so they don't get blown out of their positions by that short term volatility. If you're not smart about how your funding is set up, you can find yourself in a world of trouble even if you are right on the investing thesis. So we have this:

A crude but useful characterization is that Situational Awareness is really really good at thinking about the long-term implications of AI, and Citadel is really really good at thinking about funding risk. [1] So now Citadel owns Situational Awareness’s long-term AI bets. And those bets seem to be up since Citadel bought them.

newsletterhunt.com: Money Stuff: The Situation Deteriorated