Situational Awareness and What It Means for Long-Term Investors

By Chris Beringer

Every few years, the investment world delivers the same lesson in a different form.

Situational Awareness, the AI-focused hedge fund founded by former OpenAI researcher Leopold Aschenbrenner, is the latest example. The fund had generated extraordinary returns through concentrated investments tied to the AI boom. By June, it reportedly was up more than 400% for 2026. Then July arrived, AI-related stocks sold off sharply, and the fund’s use of leverage turned what might otherwise have been a painful drawdown into something far more serious. After suffering significant losses, Situational Awareness ultimately sold most of its public-equity portfolio to Citadel.

Several factors were at work simultaneously. Situational Awareness had concentrated exposure to the AI theme, including semiconductor, data-center, and energy-related companies, while also maintaining short positions in parts of the software industry. Public filings earlier in the year illustrated just how concentrated the portfolio had become: three of its largest disclosed long positions represented more than half of its reported long-stock portfolio.

But concentration alone was not the decisive factor.

Leverage was the accelerant.

When those investments performed well, leverage helped produce spectacular returns. When the market moved sharply against the portfolio, leverage worked just as powerfully in reverse. Losses created financing pressure and forced the fund to reduce positions rapidly. Citadel ultimately purchased the equity portfolio at a reported discount in a transaction completed in roughly 24 hours.

This is where the lesson becomes relevant to long-term investors.

The enemy of long-term investing is not volatility. It is permanent impairment of capital.

When a fundamentally sound company experiences a 30% decline in its stock price, a long-term investor may have the ability to wait for the investment thesis to play out. If the underlying analysis is correct, time can work in the investor’s favor.

Leverage changes that equation.

Once capital has been borrowed against investments, the investor no longer has complete control over the timeline. A lender is not concerned with whether a five-year investment thesis remains intact, and a margin call does not account for intrinsic value. A temporary decline can become a permanent loss when circumstances force the sale of an investment at precisely the wrong time.

Concentration presents a related challenge. There is nothing inherently wrong with concentrating capital in the highest-conviction ideas. Many great fortunes have been created through concentrated investments. However, concentration increases the consequences of being wrong. Combining concentration with leverage dramatically reduces the margin for error.

This is also where internal controls and investment discipline become especially important.

Risk limits can appear unnecessarily conservative when investments are performing well. Success creates confidence, and that confidence can gradually lead investors to view the rules designed to protect capital as obstacles to maximizing returns.

That can be dangerous.

Variations of this story have appeared repeatedly—Long-Term Capital Management, Lehman Brothers, Archegos, and now Situational Awareness. The circumstances surrounding each were very different, but leverage and concentration repeatedly transformed manageable mistakes into existential problems.

The mathematics of permanent loss are unforgiving. A 25% loss requires a 33% gain to recover. A 50% loss requires a 100% gain. A 75% loss requires a 300% gain simply to return to the starting point.

Long-term investing is ultimately about compounding, and compounding requires survival.

Investors naturally ask, “How much can be gained if the investment thesis is correct?”

Situational Awareness serves as a reminder that equal attention should be given to another question:

“What happens if the investment thesis is wrong?”

Over decades of investing, avoiding the permanent impairment of capital may ultimately matter far more than extracting a few additional percentage points from successful investments.

About the Author

Christopher M. Beringer

Chris has extensive experience advising high net worth families establishing family offices and/or family investment companies, in regard to feasibility, design, staffing, transitioning and IT operations.