AI Fund Situational Awareness Shakes Jane Street and Worries Central Banks

A $15 billion loss draws the attention of central banks. The U.S. Federal Reserve and the Bank of England are questioning major banks about their relationships with leading trading firms, according to the Financial Times. These inquiries come after the troubles of the Situational Awareness fund and the heavy losses recorded by Jane Street in July.

Supervisors are particularly looking to understand how bank exposures evolve during a trading session and how control mechanisms react when markets turn quickly.

Key Points

• The Fed and the Bank of England are questioning banks about their exposures to major trading firms.
• Situational Awareness reportedly lost 67% in July following the drop in stocks related to AI and semiconductors.
• Jane Street is said to have recorded a monthly loss of about $15 billion, partly related to this crisis.
• The SEC is simultaneously examining the use of leverage and the exchanges between the fund and its creditor banks.

Situational Awareness Trapped by Its Bet on Artificial Intelligence

Founded by Leopold Aschenbrenner, a former researcher at OpenAI, Situational Awareness concentrated a significant portion of its investments on companies related to artificial intelligence and semiconductors. This strategy had produced strong performances in the first half of the year, before reversing during the correction in July.

According to Reuters and the Financial Times, the portfolio reportedly lost about 67% in one month. The fund had to sell off most of its listed shares in Citadel Securities to reduce its positions. These forced sales highlight the role of leverage: when the value of the collateralized assets falls, lenders demand more collateral or impose the closure of certain positions.

Jane Street was among the investors in Situational Awareness. The firm also held its own positions in the affected tech stocks. This combination is said to have contributed to a loss of about $15 billion in July, the first monthly loss for the group in nearly a decade.

However, it does not undermine its overall performance: Jane Street had already generated over $40 billion in net trading revenue since the beginning of the year by early August.

The Fed and the Bank of England Scrutinize Bank Exposures

According to Financial Times reports, the Fed and the BoE are now asking banks to detail their exposure to major trading firms. The questions focus on their risk appetite, the evolution of bank commitments during a session, and the concrete functioning of controls when volatility increases.

The goal is to determine if the difficulties of a fund or a trading firm can transmit to its lenders. These players use banks to finance their positions, borrow securities, and obtain leverage. However, a single firm can deal with multiple institutions, without each having necessarily a complete view of its total indebtedness.

The SEC had already sent formal requests in August to Goldman Sachs, JPMorgan, Citigroup, and Bank of America. The regulator is particularly looking to reconstruct the transactions that triggered the margin calls of Situational Awareness, its use of leverage, and its exchanges with its creditors.

Reuters notes that it has not independently confirmed the information from the Financial Times. The Fed, the Bank of England, and Jane Street had also not commented at the time of publication. This case illustrates the risk associated with concentrated and credit-financed positions, even when taken by players with significant resources.

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