On Sunday, Ross Gerber, the CEO of Gerber Kawasaki, highlighted the downfall of former OpenAI researcher Leopold Aschenbrenner’s Situational Awareness hedge fund as a cautionary tale about the risks of overusing leverage. Gerber emphasized that the core concept of investing in artificial intelligence was not flawed, but rather the excessive use of borrowed capital was the real problem. In a post on X, he described how the failure illustrates the dangers of overreliance on debt and inflated expectations. The fund, which reached $45 billion at its peak, sold nearly its entire stock portfolio to Citadel Securities last week.
Situational Awareness had expanded to nearly $20 billion in assets, posting a net return of 439% through June. However, the fund’s strategy collapsed when market conditions shifted, causing massive losses that erased years of progress in just days. 'Leverage can destroy years of gains,' Gerber warned. He further explained that such a failure was not a simple competition between patience and speed. 'It is a lesson in leverage, hubris, and inexperience,' he wrote, noting the dangers of building high-risk, high-reward strategies. The portfolio, aggressively invested in companies tied to the artificial intelligence industry, dropped 67 percent in July.
Leverage vs. Compounding
Gerber compared Situational Awareness’s method to Warren Buffett’s long-term investment philosophy, which prioritizes compounding returns over time. He argued that it is entirely possible to build substantial wealth without taking on reckless amounts of debt. According to Gerber, compounding may start slowly but becomes increasingly powerful over decades. 'That is not investing. It is betting,' Gerber stated, pointing out how the AI thesis had been transformed into a high-stakes gamble through the use of leverage.
Despite the fund’s failure, Gerber remains confident in the long-term potential of the AI investment thesis. He pointed to ongoing demand for semiconductors, data centers, and supporting infrastructure like cooling and networking systems. Recent earnings reports have also reinforced this idea, with companies in the S&P 500 and Nasdaq 100 exceeding expectations by notable margins. While the fund eventually reached a deal with Citadel, the real downfall was the debt that had been used to scale the strategy.