Situational Awareness and the Impending Stock Market Volatility

"The forces that destroyed SA were also what generated its 4×+ return"...yes, that is what levrage means? And it goes both ways.

The interesting part what this article states: SA was essentialy a thematic ETF without any hedging to buffer downside, and got margin called.

This fund returned 47% in its first 6m and over 400% prior to the downturn.

I don't understand how the investors didn't realize this was going to blow up. Returns like that are not asymmetrical and can only be produced with leverage, at least when you're trading paper.

When something is inevitable and there is a large enough position, this makes adversarial attacks likely. Every small drop causes an amplified amount of pain to the investor which causes them to liquidate positions furthering the decline. SA doesn't have the history or relationships yet to endure margin calls.

I don't see the edge these companies have when they're just going long a very particular position, namely anything related to AI. Long term value in finance is made in a couple of ways. For instance, relationships & being able to source deals (lots of PE firms), short term trading infrastructure and knowledge (Renaissance), capital and clout to make favorable deals (Buffet), etc. Even then the skills are fleeting as employees leave taking knowledge and companies raise money to compete.

Buying Nvidia on leverage is not a long term strategy. Especially when all your investments are common stock and obvious.

I think the collapse of SA is very simple (as long as I'm not wrong about it of course hehe).

SA weren't geniuses, they weren't sophisticated. They just did the same thing everyone else did, all in on semi-conductor, AI and memory positions. They got great returns because 1) everyone got great returns and 2) they were leveraged through their ears. In fact, not only they weren't geniuses, they were pretty bad at risk management, so bad that the first mild drawdown triggered margin calls on their over-leveraged bets and they couldn't cover them.

TLDR: SA didn't have alpha, they just looked good through over-leveraged beta and got caught

How does it actually work under the hood?

It's a good reminder that there are many ways you might interpret Citadel's intervention...from everything I've read, it seems that everyone wants to believe this is a bullish position on AI.