A modern-day version of an old fable updated to include leverage and greed. Recent media reports outlining the extraordinary success of a young, tech savvy hedge fund manager illustrate what can happen when you get too greedy for extraordinary returns and employ reckless borrowing.
It all begins when Leopold Aschenbrenner, a valedictorian and OpenAI employee, wrote a 165-page opus called “Situational Awareness” and is immediately lauded as visionary genius. With that as a resume, he started a hedge fund that grew from $100 million to $45 billion in less than two years. Unbelievable performance in a short period of time attracted diverse investors, many of whom should have known better, but all seeking unrealistic returns on their investment. Apparently without doing even rudimentary due diligence.
Then the wheels came off. Markets went against him, some of his long positions were down while some of his shorts went up. The banks made margin calls, and Citadel swooped in and bought most of his public book, at a discount?
Mr. Aschenbrenner made three significant mistakes:
- An aggressive portfolio strategy, exacerbated by very high-risk borrowing, sometimes as much as 3 – 4x leverage.
- Too many eggs in too few baskets with over concentration in too few positions. High conviction investing can lead to excessive concentration.
- Markets can stay irrational longer than you can stay solvent. You should never put yourself in a position that could force asset sales at a bad time.
Mr. Aschenbrenner made several mistakes that are well understood by experienced investors. Which gives rise to the question, “can you teach a new dog old tricks?”
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
