Prof G Markets - Aschenbrenner’s AI Fund Collapse Is Just The Beginning

Episode Date: August 4, 2026

Ed Elson is joined by Michael Green to discuss the role that leverage played in the turmoil with Leopold Aschenbrenner’s fund, Situational Awareness, and how leveraged-ETFs are impacting the semiconductor industry. Then, Katie Martin returns to break down why the U.S. intervened to help Japan with the yen and whether the U.S. is actually in a position to prop up the currency. Finally, Ed gives his take on Trump’s decision to sell early access to his social media posts.  Michael Green is the Chief Strategist and Portfolio Manager for Simplify Asset Management and author of the Yes I give a fig Substack. Katie Martin is a markets columnist and editorial board member at the Financial Times. Subscribe to the Prof G Markets Youtube Channel  Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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made the switch. So why not you? Try O-D-O-4-3 at O-D-O-O-O-com. That's O-D-O-O-O-O-com. Pouders, Pills, plunges. Everywhere you look, there seems to be a new wellness trend. We all want to feel good, and if there's a way to feel better, I think, wouldn't you want to try it? I would. What's the cost of being well? And why are we so obsessed with it in the first place? That's this week on Explain It to Me. Find episodes every Sunday, wherever you get podcasts. It's evil, then that building is hell. Welcome to Profi Markets. I'm Ed Elson. It is August 4th. Let's check in on yesterday's

market vitals. The major indices climbed after President Trump called off an attack and Iran indicated Hormuz negotiations are making progress. The Dow closed at a record high, and Amazon reached a $3 trillion valuation for the first time. Meanwhile, Brent crude fell, the yield on 10-year treasuries declined, and finally, the Japanese yen climbed off the US joined Tokyo to support it. More on that later. Okay, what else is happening? For months, investors have been asking how the AI boom might end, and last week they got a glimpse. 24-year-old Leopold Ashenbrenner's Fund situational awareness sent a letter to investors on July 24th,

reporting a 439% net return for the first half of the year. In a postscript, Ashton Brenner wrote that it was, quote, a particularly good time to add funds. But just six days later, the fund had lost roughly $35 billion in assets, plunging from a peak of $45 billion to around $10 billion. And Ashton Brennan was forced to unwind his entire public stock portfolio in a fire sale that ended up going, to Ken Griffin's Citadel.

Investors are reading this story as a warning sign for the increasingly debt-fueled AI boom. Situational awareness reportedly used as much as 400% leverage to amplify its bets on AI infrastructure. That helped the firm return more than 1,000% since its inception. But when those bets went south, the same leverage accelerated the losses and forced the fund into liquidation.

We wanted to talk to someone who manages a fund and who has spent years thinking, about leverage and market structure. So we're going to discuss this with Michael Green, chief strategist and portfolio manager for Simplify Asset Management and author of the Yes, I Give a FIG substack. Michael, thank you so much for joining us. Let's just start with your initial reactions to the implosion of situational awareness. How did this happen? What can we learn from it? You know, the quick answer is that when you look at somebody who is engaged in the behaviors that has, there's really no mechanism for him to have learned not to do this. And so he had a very strong

thesis. He expressed it with the extraordinary use of leverage. His initial exposure was largely to non-public entities, and he had grown his business under that framework, which has a component of much lower volatility framing to it because non-public entities don't reprice themselves in the same manner. But when you start running strategies that are running that much leverage against this much volatility for the individual securities. Unfortunately, a blow-up becomes inevitable, and it really looks like what happened within Leo's portfolio is that he created conditions under which a small decline in prices would force him to sell to reduce his leverage, which in turn caused prices to fall further, which caused him to be forced to sell to reduce leverage further, and ultimately

that cascaded into an event that sent both his longs and his shorts against him, in particular he very much had the thesis that traditional software companies would be heavily disintermediated by the growth of AI in particular the software sector. That obviously contributed to the underperformance of that sector for a period. His selling actually contributed to the underperformance of that sector. And as he began to be forced to unwind his portfolio, that forced prices to move in the opposite direction of his underlying positioning and created conditions for the rapid collapse of the fund and the need to deliver it in as quick a time as he did. Nobody in their right mind should give a 25-year-old $20 billion at 4x leverage, but you actually can't blame the 24-year-old.

The reality is he had a very strong view. He had a very strong conviction on his view, and everything in his experience, based up to that point, had told him that this was the right strategy to pursue. Once you become that large, the street actually identifies you as as a target. You effectively become a wounded shark and a feeding frenzy emerges. You recently wrote a piece about how, I mean, many of the stocks that he was invested in, the semi-stocks, nebius, sandisk, micron, et cetera, how a lot of the activity and the volatility that we're seeing in that market has been the result of the rise of leveraged ETFs. Could you talk more about how that is impacting the semiconductor sector right now and why,

it matters to investors. A levered ETF carries the same characteristics as Leo's portfolio, which is obviously running at 4x leverage. And the difference between the two is that a levered ETF, because it has a prospectus that requires it to maintain that levered exposure, has to rebalance every day. And this is where volatility creates a phenomenon called volatility drag. If you imagine a series in which I make 10% today and lose 10% tomorrow, Many people would assume that the answer to that is I now have a zero return.

But the reality is I start with $1. I now have $1.10 and $0.10. And I lose 10%. I have 0.99.99. I've lost a penny. If I add four times leverage to that, you actually end up with a two to the fourth power impact on that volatility drag. Instead of investing $1, I've now invested $1 of equity and $3 of borrowing. I'm up 10%, therefore I suddenly have 440, meaning my equity has risen, because I only owe $300, my equity has risen to 140.

That is a 40% gain on a 10% change in the underlier, exactly as you would anticipate. But if you do the exact same math for what happens now if I fall 10%, the compounding effect of that leverage and the need to rebalance it creates the conditions that cause these sorts of of catastrophic losses. If you then add the additional layers you do with the ETFs that they need to rebalance every single day, it's not like they went from 140 equity with 300 of borrowing.

They actually have to lever up that 140-4x. So four times 140 is going to be, you know, 660, right? So that actually means you were at 440 in terms of your exposure the day before. Now I have to increase my position sizes by nearly 50% to maintain the leverage that I've promised my investors. That means that it creates what's called endogenous flow. It actually forces buying even without new investors adding money into the system

and contributes to the sort of run-up that we have seen unless investors harvest those gains. So the piece that I wrote about is called a semi-theory of everything in explaining how this phenomenon plays out. when you have large series of complexes that have historically run on this, most professional investors would run them the way I described as a volatility harvesting strategy, taking advantage of the fact that that compounding creates a loss. You actually short both sides of the trade and harvest the volatility loss associated with the volatility drag. It creates a very stable return profile as long as your volatility characteristics are maintained. Unfortunately, in the excitement of the post-March recovery in markets, early April, to be more precise, we actually saw retail investors step into these types of products because they were seeking out a Leopold-like experience. They were actually buying these 3x-levered ETFs or 2x levered single-stock ETFs and then holding rather than harvesting their positions. We actually saw a behavior that suggested people were trying to dollar-cost average into these strategies.

If you run through the math on this, it is just a terrible way to invest. At 3x leverage, running the level of volatility we were experiencing in the semiconductor space as of April, May, you would need a return in excess of 170% a year in order to simply break even on the volatility harvesting. To dollar cost average into something that has 170% break even is absolutely absurd. but again a byproduct of the lack of education and candidly the tools that we have put out into the marketplace with an objective to attract people to shiny objects as compared to thoughtful investment vehicles.

It seems like South Korea is the perfect example of how this all goes wrong. I mean, we saw what happened last week. We saw the Cospy, the South Korean stock market, crashing 44% from its June highs. We saw literally more than a million people in South Korea receiving margin calls, hundreds of thousands seeing their accounts liquidated to zero.

And we also saw a lot of protest from South Korea after this event. And a lot of people are saying, let's abolish these levied ETFs. Let's get rid of them. How could you let this happen to us? How could you allow us to become addicted to this stuff? Is that the answer? So what do we do about these levid ETFs if they are such a dangerous investment strategy? Well, again, it depends on how you use them, right?

So a hammer is a very dangerous tool, if used improperly. It is a very productive tool, if used properly. As volatility harvesting regimes and volatility harvesting tools, these can be used by professional investors to effectively short a realized volatility framework and create conditions under which profits can be generated by providing effectively the financing for those vehicles. South Korea has already banned the levered ETFs. They've now been forced to close their market multiple times

over the past several weeks after and literally doubling the number of times it had been closed in a three-week period over its entire history since roughly 1990. They've recognized that these products have, you know, create almost no social utility. In the United States, we are still trapped by market fundamentalism, And we see that in everything from Kevin Warsh's recent testimony at the Fed to the general view on regulatory frameworks within the United States. Just let the market decide.

There's a very reason we don't do that. There's a reason we now have labeling on drugs that tell us what the addictive contents of them are. We now have labeling on food that tells us what the ingredient list is. And the reason why is because we used to have the same general view. buyer beware, right? You need to be responsible for yourself. Well, that's extremely difficult for an illiterate immigrant to figure out if the sausage that they are eating is filled with potato flour or if it is filled with meat. We recognize that. We took steps to address it. And in many ways, I think we often go too far in this. We do need to recognize that there is a role for experimentation and the utility of tools,

as I was describing. We could ban hammers because somebody hurt somebody with a hammer. That would be a mistake. under most economic framings. But in this case, we have created, effectively, a gambling environment in which people are increasingly nihilistic in their interpretation of prices, effectively assuming in many ways that governments are stepping in to support these prices or simply print money to create wealth to paper over the many problems that we see in our society. You and I have discussed some of those. That's simply untrue.

I just would emphasize for the younger audience, never subsidize. to conspiracy when incompetence will suffice. We have regulators who have largely abandoned their role, and as a result, we are left with a series of products that are being created that I would describe as half-boiled spaghetti being thrown at the wall in an attempt to see what sticks and attracts investor dollars. Just looking at what's happening in the U.S. now, Assets Under Management in U.S. leveraged ETFs have reached a record $218 billion up 60%

since the end of March. I mean, it continues to explode all the things that went wrong in South Korea. They're becoming more and more popular in the United States. Are we headed for a South Korea-like implosion in the United States? Well, unfortunately, as you know, this is one of the key concerns, and it's tied to my work around market structure, the growth of passive and price insensitive. And in this case, were referring to leverage vehicles that actually do not consider is what they're buying with leverage a good thing or a bad thing. They're simply fulfilling an investment mandate, what I call a systematic portfolio rebalancing. Those create conditions under which these types of feedback loops can play out. And I would highlight to South Korea that actually much of the problem was not generated in South Korea.

We imposed these conditions in South Korea through the introduction of an unlevered memorandum. centric ETF, DRAM, in the United States, which exploded in size to almost as large as Leo Aschen Bruner's portfolio, and was sending roughly half of its dollars in Korean one hedged terms. So they were selling the currency, buying the stock in Korea. It brings to mind the 1971 experience from U.S. Treasury Undersecretary John Connolly saying to the emerging markets, It's our currency, but your problem. This was our ETF and their problem. And I think, unfortunately, you're going to see the regulatory environment

begin to recognize that, and it very well may be forced to change. Michael Green is Chief Strategist and Portfolio Manager for Simplify Asset Management. He's also the author of the Yes, I Give a Fig substack. Michael, we always appreciate it. Thank you so much. My pleasure. After the break, why the U.S. is stepping in to support Japan. And by the way, if you're listening to this episode Tuesday morning, then sign up for

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And the best part, O-DUreve. places multiple expensive platforms for a fraction of the cost. That's why over thousands of businesses have made the switch. So why not you? Try Odu for free at Odu.com. That's ODOO.com. We're back with Profi markets. Japan's currency is collapsing, and last week, the United States stepped into help. On Thursday, the Japanese yen fell to nearly 164 per dollar, its weakest level in 40 years, And that night, Tokyo intervened, selling as much as $59 billion U.S. dollars to buy back its own currency. But then on Friday, the U.S. Treasury did something it hasn't done since 2011. It joined the intervention.

Japan confirmed the operation yesterday morning. Trump framed it partly as a favor, calling it a, quote, signal of friendship. Here is what he said. We're very strong, very, very strong financially. And they are, you know, they have a weakening yen. and they wanted a little bit of help and we're always there for Japan. Japan's been very good to us with the exception

of course of Pearl Harbor. Joining us to discuss America's intervention in Japan we're speaking with Katie Martin, Markets columnist and editorial board member at the Financial Times. Katie, thank you for joining us on the show. I just got to start with your reactions

to Trump's explanation as to why we have intervened here. Why have we done this? The line about Pearl Harbor is one of the unintentionally most hilarious things I've had in global macro for quite some time. But there's various different ways of looking at this situation. There is definitely an interpretation here that it's just nice to be nice, right? And Japan has got a problem with a sliding currency and it's been trying to tackle it and it hasn't really been working. The

currency's just sort of been, you know, gradually dripping lower this whole time. Nothing's really been working. Admittedly, Japan hasn't really tried really jacking up interest rates, but it wanted some help and the US came to help. And I think this is one quite important thing to bear in mind here is that one of the things that this joint intervention does, and as you mentioned, this is the first time the US has been involved at all in this kind of way since 2011, but that was a G7 intervention. Actually, as a bilateral thing, you have to go back even further. You have to go back best part of 30 years to find anything similar to this. Anyway, what it does is it's a signal to the world of we help out our friends.

So if you recall back end of last year, Javier Miele, the president of Argentina, he wanted some help with his currency in the run up to an election, and Scott Besson came to help. Some countries in the Gulf, in the Middle East, they needed some help around the time of the start of the war in Iran. and there was talk of opening up swap lines for countries that are friendly to US interests that might need them. So the US does make a show of being good friends to its friends. But I think there is more than a little self-interest going on here. You'll be shocked to hear. Japan has two main ways of supporting its currency.

It can raise interest rates really quickly, which is quite difficult to do for domestic. reasons, or it can sell loads of dollars. And I mean loads of dollars. And when it sells dollars, that means that it sells US treasuries. Now, I'm sure listeners to your podcast are well aware that the US treasury market is in a bit of a fix at the moment. Prices have been falling quite hard. Yields have been pushing up. And borrowing costs have got really quite elevated, especially for long-term debt. And so the last thing the US wants is for Japan to dump a load of of new treasuries onto the market. So I think that's why they're getting involved here.

It's kind of a case of standing behind Japan, being that kind of big brother, and saying to the market back off, stop selling this currency. From my understanding, Japan has been selling treasuries all year. They've done it multiple times before this summer. And if the yen continues to weaken, I mean, it seems as if, Japan will just have to keep selling more of its treasuries, or I guess the US will have to continue to intervene and continue to send money over to them.

I mean, why wouldn't this keep happening? Why wouldn't this repeat over and over again? Well, that's the thing. I've been talking to a bunch of people in the markets about what's happened over the course of today, and most of them are saying, this stops the rot. you know, if there are speculative accounts out there that are trying to really harm the yen,

and it's not clear to me that they are, it's not clear to me there's a massive market dislocation going on here. But in any case, this does help to slow that down. But really what would help Japan and what would help the currency to perk up at this point would be, first of all, some big rises in US, in Japanese interest rates, as I mentioned. The problem there is, again, Japanese government And bond yields, they're pretty low by global standards, but they're very high by Japanese standards. And if they get much higher because Japan raises interest rates, then all of a sudden, there's a lot of Japanese investors for whom actually putting money to work in the US, putting money to work in US treasuries kind of isn't worth it anymore. You may as well just keep that money at home. So again,

a solution to the yen problem would potentially sap quite a lot of demand for US treasuries out of the system. And again, that's not really in the US interest. So what would really help the yen would be big rises in Japanese interest rates and or big declines in US government bond yields because those markets tend to be closely correlated. Now, the reason that US government bond markets are in trouble and the US borrowing costs to hire is nothing to do with Japan is because the markets are looking up, they're listening to what they hear from Kevin Walsh, new chair of the Fed. and saying, I don't get it. I just, I don't understand how the Fed is relating to markets at the moment. I don't understand why they're not raising interest rates given their stated objectives. In addition to which the Fed under Kevin Walsh is talking about talking a lot less to markets,

and that introduces volatility. So, ironically, if there was a shift in regime on the U.S. side, that would actually do a lot more good for the currency on the Japanese side. So look, you know, will this go on all summer? Will we end up with the US constantly coming into the dollar yen market or, weirdly, the euro yen market? But will it have to keep on buying yen to try and support the currency? Or is just the fact that they're there standing shoulder to shoulder with Japan? Is that enough to put the market off? And there's a good chance that it is. One of the strange things about this, Katie, is that actually the US is selling euros in this transaction, this intervention.

Why is that happening? This is a total curveball. I have never heard of any country intervening in anyone else's market using a third-party currency before. This is a new one on me, a new one to everyone I've spoken to about it. But basically, it's a function of the fact that the pot of money that the US has stored away for these sorts of instances is predominantly in euros and yen. So this is what they've got available to, to,

for these sorts of purposes. I gather, you know, from reporting that some of my colleagues have done at the FT that the US authorities have been in touch with the European Central Bank. They have been in contact about this. This didn't come as a total surprise, I don't think, to the European Central Bank. But again, if this carries on and if the US ends up in a situation where it's selling shed loads of euros against the yen, and you start to get exchange rate distortions in the euro as a result of what the US is doing to help out Japan, we're in, we are not in Kansas anymore. I don't know how that can't have that. Trump said something interesting in that clip. Of course, the Pearl Harbor part was the most

interesting and hilarious, but at the beginning of it, he said that we are very financially strong, basically saying, you know, we have the money to help them, we like them, so we're going to help them. My understanding is that we have trillions of dollars of debt. and actually we're not very financially strong. I mean, what is your view on whether this is appropriate and to what extent we actually are in a position to be sending money over to nations when they're in a rut with their currency?

I mean, the US has tremendous financial firepower. You know, for all of the problems around debt sustainability, around little cracks that you can see in the stock market, the reality is it operates the world's dominant reserve currency. It has very reliable demand for that debt. It definitely has the ability to do this. I guess one of the interesting questions that comes out of it, though, is who does Trump help in this way?

Who does Besant help in this way? So, for example, say there was a problem in UK government bond markets. Would the politics dictate that Trump and Bessent would come to the aid of the UK, politically, probably not. If you are a trader or an investor, particularly if you're, you know, of a hedge fund kind of variety, do you start taking out bets against countries that you think are politically aligned with the US? Or is there risk there that you could get caught on the wrong side of an intervention from Scott Besson? So this is a whole new way of thinking about global macro potentially, you know, which currencies, which bond markets, is it possible?

or Tabettergates when you have got this big beast, which is the US, standing behind them. Yes, I was going to bring up, you know, we had the similar situation with Argentina and Javier Milley, and this was right before his midterm election, Besson and Trump come in, and they essentially bail out the Argentine peso. And then in the case of Japan, I don't know much about the new Prime Minister Takaichi, but I do know that she has praised Trump pretty extensively. She has said that only you, Donald, I'm quoting her, can achieve world peace. She pushed for him to be nominated for the Nobel Peace Prize. You know, she said that this guy's great, which for me raises the question.

Like, is it unreasonable to assume that we are bailing Japan out, at least partly because the leader is saying nice things about our president? Is bailing out the right kind of framing for this? I'm not sure. But there are very clearly financial benefits to making nice with the US. But also the US is clearly very sensitive to any possibility that any major buyers of US treasuries, it's worth bearing in mind that Japan officially holds in excess of a trillion dollars worth of US Treasury securities. It's the biggest buyer of treasuries on the planet.

But the US is very sensitive to the possibility that anyone could not, even dump their treasuries, but just feel a need not to buy quite so many treasuries in future. So, you know, the U.S. had quite a kind of allergic reaction at the start of this year when Denmark was saying, well, maybe we're not going to buy so many U.S. assets, what with how you're threatening to invade Greenland. This went down extremely badly. They're very sensitive to this. You know, the U.S. has an enormous deficit. It is extremely reliant on these debt markets. It is not, for all of the bravado, I think, you know, Scott Besson's an intelligent man, and he knows that the US is not in a position to live without these foreign buyers of U.S.

securities. This is what keeps the show on the road in the States. So is Takeichi playing a good game here quite possibly. You know, it is precisely the reluctance of Japanese authorities to tighten monetary policy and raise interest rates. And there is more kind of, there's more spending that comes as a result of this new Takeichi government. They're the core problems behind what's going on with the Japanese yen. But also, you know, domestically for Japan, inflation is a political issue. And inflation does come when you've got a weaker currency. So that's the kind of symbiosis, is that the US needs Japan to keep buying the treasuries. Japan needs the yen to be somewhat stronger than it currently is. Then Japan also needs that security. I'm

umbrella that comes from the states. So this is very much the framework that all different countries are operating under at the moment. It's very difficult geopolitically to distance yourself from the states when you have got all of these interrelationships between markets and geopolitics and security and defense and trade and all of those things all layered on top of each other. arguably tacky, she's playing quite a good game here if she can stop the rot in the currency because she's got the US standing behind her. All right. Katie Martin is Markets columnist and editorial board member at the Financial Times. Katie, foreign exchange is probably the most difficult and confusing topic in all of financial markets.

So we appreciate you simplifying it down for us and making it understandable. Thank you so much. Pleasure. It's official. Trump is now selling early access to his social media posts to Wall Street. The decision, which was rumored to be happening a few weeks ago, is now final. Trump Media has launched Truth API, a new high-speed data fee that gives financial firms a, quote, direct, licensed real-time feed of the platform's most market-moving truths.

In other words, pay Trump money, and you will get early access to his social media. media. Now, how much money must you pay? Well, reportedly you have to pay $100,000 per month. The next question is, is that worth it? Well, if you're a high-frequency trading firm, the answer is yes. Trump's tweets move billions of dollars within seconds. Those are billions of dollars that Wall Street must pursue. So if you're a real trading firm, well, then you don't have much of a choice. You have to buy this product. And as a result, Trump will make millions off of this. It's kind of like his Trump coin cryptocurrency grift, only this one is a lot bigger and a lot worse. If you are as tired of hearing about Trump's corruption as I am, then you probably don't

really care much to hear about this story. It's just another chapter in an endless anthology of fraud and shameless profiteering at the White House. But therein lies the problem. Because the reality is this story should be front-page news across every single media. platform in the nation. It is a federal scandal, the likes of which we've never seen. But it isn't front page news because it has become normalized. We are now numb to these kinds of headlines. We treat them as if it's any other story. And maybe it is, in which case, look how far we've fallen. The only thing left between America becoming a literal third world nation isn't regulation. that's been gutted.

It isn't enforcement, and it certainly isn't Congress. The only thing left is you, or more specifically, you and your ability to care. Now, they know this, and that's why they'll do everything in their power to convince you that this doesn't matter, and that you shouldn't care, and that it's just a sideshow. But as someone who is just as tired and bored of this as you are, I'm here to tell you should. Do not stop caring. Okay. That's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by

Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Chalon, Kristen O'Donohue, and Mia Silverio, and our social producer is Jake McPherson. Thank you for listening to Prof G Markets from Profi Media. If you liked what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.