Hedge fund Melvin Capital collapses after $2B AI bet fails

A hot AI-focused hedge fund just got wiped out after doubling down on borrowed money that it couldn’t repay. Situational Awareness, founded by former FTX and OpenAI analyst Leopold Aschenbrenner, lost so much on leveraged bets that it failed to meet margin calls and was forced to close its doors this week.

The fund’s strategy relied on borrowed cash to amplify gains from AI stocks that soared in 2025 and early 2026. Analysts say Aschenbrenner pitched a bold thesis—that AI would transform the economy—and attracted investors eager to ride the wave. But high leverage works both ways: when markets cooled and losses mounted, the fund had to dump assets in a fire sale to cover debts.

Inside sources say the fund’s leverage ratio was “far above” typical levels for a long/short equity strategy. While the exact size of the losses isn’t public, one investor told *The Information* the fund had grown to nearly $2 billion before collapsing. Margin calls began late last week after a sharp drop in AI chipmaker stocks, triggering forced liquidations that deepened the slide.

Experts warn this is a cautionary tale about leverage in AI investing. “When everyone is chasing the same trade with borrowed money, the exit door gets very narrow,” said a senior portfolio manager at a rival hedge fund. Aschenbrenner’s rise—from FTX to OpenAI to launching his own fund—made him a Silicon Valley darling, but his rapid fall shows how fast leverage can turn promise into peril.