Major Wall Street banks extended tens of billions of dollars in loans to Situational Awareness, a small artificial intelligence hedge fund that narrowly avoided total collapse after severe market losses.
Regulatory filings show Goldman Sachs and Bank of America were among the key lenders behind the eight-person firm.
Founded in 2024, the fund was run by a 24-year-old manager with no prior trading experience.
It operated with minimal risk-monitoring staff, while its chief compliance officer split working hours between San Francisco headquarters and Reno, Nevada.
A One-Way Bet on AI Stocks
Situational Awareness used bank leverage to build a massive, one-way directional bet on artificial intelligence equities.
When several underlying stocks fell sharply over the summer, the fund sold off significant equity positions to meet creditor demands and avoid a complete meltdown.
Financial regulators said the firm's distress exposed persistent systemic risks tied to aggressive bank lending to large investors.
Treasury Department data shows hedge fund borrowing from financial institutions reached nearly $3.7 trillion by midyear, a ten-year high and more than triple the level six years earlier at the start of the pandemic.
While banks allocated part of that leverage to short positions meant to hedge market drops, the majority was deployed to wager on rising equity prices.
