How the ‘Nostradamus of AI’ Got It Wrong

0:05Ryan Knutson:Last week, there was a wedding.

0:10The setting?

0:12Ryan Knutson:A coastal town in Northern California. How big of an affair was this going to be? This was the event of the Silicon Valley summer. There were all kinds of top AI and other tech investors and executives coming. It was sort of the place to be. You wanted to see and be seen there. The bride was the chief of staff to the CEO of Anthropic. And the groom was an investing wunderkind named Leopold Aschenbrenner. So if I had asked you a month ago, who is Leopold Aschenbrenner, how would you answer that question? A month ago, there was a consensus that Leo Aschenbrenner was a Nostradamus of some sorts, of the AI age.

1:01Our colleague Gregory Zuckerman covers business and investing. He was young, made predictions. Some of them seemed to come true. He had vision. People deferred to him, so they gave him a lot of money.

1:15Ryan Knutson:Aschenbrenner is 24 years old. And just days before his wedding, He was running a hedge fund worth$45 billion. But this was not like also a normal wedding, right? There was like some other features. It wasn't the kind of wedding that many of us experienced. There were no gifts. For one, he didn't need the gifts. And there were breakout sessions, sort of like a conference or TED Talk kind of thing. There were interesting people, smart people going to be there. You want to hear from them. It was like a wedding slash business conference. Yeah, there were colloquiums. So it sounds like a fun, interesting kind of event I would have liked to have been invited.

1:56Ryan Knutson:But in the lead up to the grand event, there was some serious trouble brewing for Ashenbrenner's fund. Bit of an understatement, sorry. Yeah. So he was counting down to his wedding, as for the guests and his beautiful bride. But behind the scenes, his hedge fund was melting down. It was collapsing. It was imploding. So your hedge fund melting down, is that worse than rain on your wedding day? It's a little bit worse. Investors thought Ashton Brenner was kind of clairvoyant, that he could guide them through a confusing time. But it turned out Ashton Brenner made a textbook mistake that brought his mighty hedge fund crashing down.

2:39Ryan Knutson:Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, August 4th.

2:52Ryan Knutson:Coming up on the show, what the Nostradamus of AI got wrong.

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4:11Ryan Knutson:Before he was anointed as an investing prodigy, Leopold Aschenbrenner had a resume that looked tailor-made for a career in the tech world. So Leo Aschenbrenner grew up in Germany, came to Columbia University, did exceedingly well in school. He subsequently put on his LinkedIn, he was proud that his LSAT score was like better than 99.4%, I think, of every other score. He was proud of that. I personally have not listed my SAT scores, shared them in many years. I personally will not share my SAT scores. That too, right. After college, Ashenbrenner moved from one buzzy startup to another. He worked at among the most important and influential and controversial companies out there.

4:58He worked at FTX, the Sam Bankman Freed startup. which became a crypto power. And then imploded. And then imploded, right. Tonight, the cryptocurrency world is reeling after the meltdown of one of its most popular trading platforms. One of the largest exchanges in the world, FTX, collapsed this week after a chain...

5:18Ryan Knutson:After a stint at FTX, Ashton Brenner went to work for one of the premier tech powerhouses. He went for Sam Altman's OpenAI, worked on the safety side of things, which is quite important. In 2024, OpenAI fired Aschenbrenner, claiming that he leaked sensitive company information to the husband of an executive at their main rival, Anthropic. Aschenbrenner didn't respond to requests for comment. But he did talk about his firing from OpenAI in a 2024 podcast interview. He said he wrote and shared a brainstorming document on AI safety. You know, I think for context, it was totally normal at OpenAI at the time to share sort of safety ideas with external researchers for feedback.

5:58Ryan Knutson:You know, it happened all the time. Ashen Brander's big break came next when he wrote a 165-page essay called Situational Awareness, The Decade Ahead. It was a manifesto on the future that went viral in tech circles. Yeah. So he made the argument that he is among the few who has situational awareness, meaning he understands where we are in this economy, how things are transitioning. the importance of AI, where things are going. And there are very few people with that, quote-unquote, situational awareness or that ability to predict the future. The manifesto propelled Ashton Brenner to Silicon Valley fame and helped him raise money for his next venture, a hedge fund that would invest based on his ideas about the future.

6:47Ryan Knutson:Here's Ashton Brenner again. Basically, the thing this investment firm will be will be kind of like, you know, a brain trust on AI. It's going to be all about situational awareness. We're going to have the best situational awareness in the business. You know, we're going to have way more situational business than any of the people who manage money in New York. We're definitely going to, you know, we're going to do great on investing. Ashton Brenner named his hedge fund situational awareness. Why would anybody believe that this guy knows what's coming in a decade ahead? Well, listen, we're all looking for direction and guidance.

7:18And it's not just you and I and the masses. Even the stars in Silicon Valley are kind of confused. One day, AI is going to take all our jobs away. Next day, they're predicting that it won't affect the job market. They're as confused as anybody. And it's because it's a novel technology.

7:37Ryan Knutson:Greg says that in his decades of covering Wall Street, he's noticed that more seasoned investors tend to look to smart young people for ideas. Older, wealthy individuals, investors and others, executives and such, are always looking to the next generation, to the younger generation, for predictions, for guidance, for some direction about where this world is going because it's really changing so rapidly. And we're aware, we older people are aware that we don't really have our finger on the pulse. And here was this young, well-versed, intelligent individual who presents really well. He came to guide us all.

8:14Ryan Knutson:Yeah, everyone's looking for guidance. He sort of presented himself like an AI messiah almost. Like I see where things are headed. I see the future. Yeah, he was seen as something of a Nostradamus. And if Ashton Brander was an oracle, the novel-length situational awareness essay was his prophecy. I mean, he's 24 years old. People entrust him with billions and billions of dollars just a few years out of college. It wouldn't seem to make sense, but even hedge fund managers and Silicon Valley executives and such in the quiet moments of their lives, they're confused. So for someone out there to speak with confidence and anticipate the future, it's something that people embrace.

9:01Ryan Knutson:So we found situational awareness, this hedge fund. Talk about its investment strategy. So they bought private investments, companies that are not yet public, such as Anthropic, and they have the ability to get in on some of these early investments, which is something of a coup now. People are searching, investors are searching for the ability to get in early on these up-and-coming future powers like Anthropic. So he had that ability, partly because of the document, partly because he was really well-connected. So investing with him was sort of a way to invest in Anthropic when you can't currently do that because Anthropic is not publicly traded.

9:42Ryan Knutson:Yes. Do we know how he was able to get that stake in Anthropic? So it's not clear. He's really well-connected. There are all kinds of either suspicions or suggestions, and they're not really accusations. He didn't do anything improper. Anthropic's allowed to sell stakes to anyone it wants to, but he leveraged his access. Yeah, and we did mention earlier that he just married the CEO's chief of staff, so that might have been helpful. Doesn't hurt. it.

10:12Ryan Knutson:The fund felt exclusive, partly because in order to get in, you had to spend a lot of money. So the minimum investment was$25 million, which is a lot in that world. It's not unheard of, but it's a substantial check. So you're really only getting people who can afford it. And that's often, in this case anyway, sort of a who's who in the world of Silicon Valley. The fund's portfolio also included more traditional stuff like stocks and options. And like other hedge funds, situational awareness leveraged its positions to go even bigger on its investments. So every hedge fund out there uses leverage to some extent.

10:55They borrow money basically to amplify their bets. Often it's you go to a bank and you borrow money. You say, I've got a dollar of investment money. hey, can I borrow against that? You put a dollar into the market. Usually in his case, he was getting three or four dollars of lending of borrowed money from banks. And that really works on the way up. So as opposed to you investing a dollar in the market and then it doubles and you've got two dollars. If you borrow three, four dollars on top of that dollar and it all goes up, You multiply your returns. Obviously, you also multiply your losses when things turn around and you have a setback.

11:40And how was the fund performing in the early days? So the fund was killing it. I mean, it was outperforming most any other rival out there. he was doing really well, both based on the growth of his private investments like Anthropic, but also the public ones. I mean, he grew this thing to$45 billion. He was trouncing public markets and seems like he was on his way to creating a hedge fund power. So he really looked like he had a bright future ahead of him. And it all turns around really quickly.

12:21Ryan Knutson:The situation that Ashton Brenner was unaware of? That's next.

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13:37Ryan Knutson:As of July, situational awareness had been a hedge fund for less than two years. But it was already managing a portfolio of more than$45 billion. And then, just days ago, things started to get shaky. Where does the trouble start? So it started when people, investors, started having second thoughts about many of the hyperscalers and other types of AI-related companies. The thinking being, well, where are the returns? A lot of the biggest AI-related companies for the first time ever are going to the debt markets and they're borrowing money, and people are kind of now at the point where they're saying, well, yeah, you're talking about big returns, but when are we going to get those returns?

14:24Ryan Knutson:Wall Street has been worried about the amount of money that AI companies are borrowing before they've proved they can be profitable in the long term. And some recent developments have made those anxieties worse. Cheaper AI models from China spooked Silicon Valley and raised questions about where the best value lies for AI. Is it in the supply chain? Chips? these overseas models. And as a result, some stocks have been hurt and they've been falling, especially those in his portfolio. A lot of the trouble for situational awareness has been centered around a South Korean chip company called SK Hynix.

15:01Ryan Knutson:The company recently went public and Ashenbrenner's fund had a huge stake. They came to the market, they sold new shares. People started having second thoughts about the stock. The stock went down. Some of the retail individual investors in South Korea started getting nervous and panicking and sold. So that stock went down, and that was part of the reason why Leo felt pressure. So this South Korean chip company that situational awareness is backing takes a hit because there are these questions about investing in the AI supply chain. But how does that one company cause so much trouble for Aschenbrenner?

15:37So SK Hynix sparked a reexamination of all kinds of AI type stocks. As a result, his stock portfolio started taking on water suddenly, quickly. And in this world, you get a margin call.

15:54Ryan Knutson:For people who don't know what a margin call is, can you just explain that? Yeah, you borrow money from someone. There are terms involved. You've got collateral you put up and they know your ability to pay back that loan. And when they see your portfolio shrinking, falling dramatically, 10, 15 percent, they right away say, hey, buddy, you've got to come up with new collateral for us. We get nervous. What you put up, the collateral against this loan is now worth a lot less than it was when we issued this loan. So you need to get that collateral back up again so that we feel confident that you'll repay this.

16:30Exactly. And that's what happened here. It was more than one call from brokers telling Leo, hey, you've got to come up with new collateral. And as a result, he had to quickly come up with new cash.

16:45Ryan Knutson:Last week, as Ashton Brenner's wedding neared, a flood of margin calls were coming into situational awareness, essentially saying, you need to show us where you're going to get a lot of money and you need to do it fast. So a week or so ago, it became clear to traders, hedge funds, people in the market, the AI world, that this guy was suffering. That he was in some trouble and was going to need cash. And that's where Ken Griffin and Citadel step in. If Leapold Ashenbrenner represents Silicon Valley's flashy up-and-comers, Ken Griffin and his fund, Citadel, represent the steady hand of the old guard.

17:25They kind of smelled a blood in the water, made a call, said, hey, can we be helpful here?

17:32Ryan Knutson:How does this negotiation play out? How does Ashton Brenner respond to Citadel and Ken Griffin's outreach? So Citadel executives got in touch, said, hey, you seem to need some cash. We can be helpful. Ashton Brenner and his executives thought about what they should be doing. They mulled. They strategized. They debated. And all of this is happening as Asher Brenner is preparing for his wedding. Yes. Hopefully he's good at compartmentalizing. It's got to be difficult to try to save your hedge fund while you're checking out tuxedos and such. Well past midnight on Wednesday, Situational Awareness reached a deal with Citadel.

18:15Ryan Knutson:The fund would hang on to its valuable Anthropic shares, but Situational Awareness would sell almost everything else to Citadel at a discount of more than 10%. That's according to a person familiar with the matter. Citadel has now publicly commented on the deal. They wrote a big check, handed it over to Ashenbrenner and his firm, and they were able to pay down their lenders. The deal left situational awareness with a slimmed-down portfolio, but one that's still valued at more than$10 billion. On Thursday, as guests were arriving for the wedding, Ashenbrenner sent a letter to investors explaining what was happening.

18:52Ryan Knutson:We let you down this month, he wrote. I take full responsibility for these events. It was a bit of a mea culpa from Ashenbrenner apologizing for the losses. That won't happen again. We've learned our lesson. Greg says there's a bit of irony in Ashenbrenner's story so far. For all his supposed insight into the future, it was a pretty basic lesson from the past that he missed. Don't over-leverage yourself, especially in a volatile part of the market. There are all kinds of strategies when it comes to hedge funds, and people borrow more money if they're investing in bonds and other kinds of things.

19:28But if you're going to borrow a lot of money, you don't want to do it to buy stocks that are really volatile because one bad week can lead to a margin call. And that's kind of what happened. Everything would have been fine, and he'd still be up a ton had he not borrowed so much money. And that's just an old-school financial issue. It's always the leverage that gets hedge funds and other investors, catches them in the end. Do you think that this soured the mood at the wedding at all? This could not have been helpful to the spirit and mood of the wedding. I have a feeling, though, these are all wealthy investor types who've suffered in their own ways time and time again.

20:18I mean, if you look at SpaceX and Elon and all the others, there's a sort of almost credibility and respect people have for those who've lost billions. You'd be shocked. Time and time again, I cover, I've written about investors who've cost their clients billions of dollars and they're pretty relaxed and calm and upbeat and not shaken. It's shocking to me. It almost comes across as like a badge of honor. There's some element of badge of honor here. Yeah, I'd be in a fetal position and embarrassed to show my face, but you get a little respect in some circles for losing a ton of money really quickly.

21:04It's a remarkable phenomenon. There's this weird assumption that if you've lost a lot of money on Wall Street, it means you can actually make a lot of money the next time. And he has made a lot of money for investors. So a lot of his core clients are still confident in him. And he really could turn things around. He's stabilized his firm. And for all we know, he'll remain the Nostradamus of AI and keep growing his firm.

21:46Ryan Knutson:That's all for today. Tuesday, August 4th. The Journal is a co-production of Spotify and The Wall Street Journal Additional reporting in this episode by Anissa Gardese, Berber Gin, and Peter Rudiger Thanks for listening. See you tomorrow