Weekly Buzz: Situational Awareness wrote a $400 million check after margin calls
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What’s going on here?
Leopold Aschenbrenner’s fund, Situational Awareness, was hit with margin calls, then still wrote a fresh $400 million check into a private company, Bloomberg reported.
A margin call is when lenders demand more collateral after positions move against you, forcing fast fundraising. Bloomberg said Situational Awareness recently sold most of its publicly traded stocks to Citadel, a major market-making and investment firm, to repay lenders and protect its private holdings. That fire drill reportedly shrank the fund’s assets to about $10 billion from $45 billion at the start of July.
Bloomberg said it followed a $100 million investment last month with another $400 million last week, though the specific portfolio company wasn’t disclosed. The message is that the fund is choosing to keep leaning into private bets even after being pushed to sell the easiest-to-sell assets.
When funds face margin calls, they usually sell their most liquid holdings first, because public stocks can be turned into cash quickly. If Bloomberg’s account is right, Situational Awareness has already drained much of that liquid layer by selling a sizable portion of their public equities to Citadel.
What’s the takeaway?
While most of us aren't running a leveraged hedge fund, there are lessons that we can all take from this incident. Heavy concentration means a single wrong call can cost an investor substantially. A diversified portfolio spread across asset classes and regions, managed to a risk level you've chosen, remains an optimal way for most individuals to invest.
(For a diversified portfolio managed to your risk level, see General Investing.)
In Other News: America's stake in a stronger Japanese yen
The yen hit 163.73 to the dollar on 30 July, its weakest in 40 years. The next day, Japan's finance ministry and the US Treasury bought yen together, the first joint operation of its kind since 1998, and the currency jumped to 157.57 within hours.
Japan has propped up its own currency before, spending a record US$74 billion on it in April and May alone. To buy yen, you need something to buy it with. Japan's reserves are mostly US government bonds, so it would have to sell those first to raise the dollars.
However, selling a big chunk at once would have flooded the market and driven bond yields up, leaving the US government paying more to borrow. American households would have felt it too, since mortgage and loan rates tend to follow. So Japan turned to a Federal Reserve facility that lets it borrow dollars against US Treasuries rather than sell them.
The yen has drifted back towards 159 since, giving up part of its bounce. Buying a currency can slow its slide, but it doesn't address the reason it's falling. Here, that's the gap between interest rates: the Bank of Japan's rate sits at 1%, against 3.5% to 3.75% in the US.
While governments can intervene to manage their currencies to an extent, where they land in a year is down to many external factors. It's an argument for spreading your money rather than picking sides.
Past performance is not an indicator of future returns. These articles were written in collaboration with Finimize.
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