CNBC’s Jim Cramer said on Thursday that Situational Awareness’ collapse is a cautionary tale about the dangers of investing with borrowed money.
“For two weeks, I’ve been telling you to get off margin, stop using borrowed money,” the “Mad Money” host said. “I didn’t want you to get caught up in what some over-leveraged hedge fund was doing. I didn’t want you to get blown out.”
The AI-focused hedge fund, founded by former OpenAI researcher Leopold Aschenbrenner, was forced to unwind its highly leveraged bets on Thursday after suffering steep losses in recent weeks. Situational Awareness embraced the popular “long hardware, short software” trade, betting on AI infrastructure companies such as Micron while shorting software stocks viewed as vulnerable to AI disruption.
When the trade reversed, the fund was forced to sell its positions to meet the margin call, putting even more pressure on fundamentally strong companies.
“The irony here is that when tech had a bit of a downturn Aschenbrenner apparently lost all the money he managed, despite excellent performance of the companies themselves,” he said.
For weeks, Cramer maintained that the sharp sell-off in AI infrastructure stocks was being driven by forced selling rather than weakening business fundamentals. Micron dropped 39% from its June 25 record high through Wednesday’s close, while Adobe climbed 36%. Those moves began to reverse Thursday, with Micron jumping 18% and Adobe slipping 6%. Cramer said the liquidation could ultimately mark a turning point by removing a major source of selling pressure.
For individual investors, Cramer said the biggest lesson is to avoid putting themselves in a similar position and refrain from investing with borrowed money.
“I want you to remember what happened here.” he added. “This business is hard enough. You don’t need margin to make it all that much harder.”
