A major hedge fund just lost $35 billion in a single month.
AI stocks pushed lower as the book got liquidated. But the fund isn’t the story. What killed it is…
And I already found the same problem in a different part of the market.
Get in front of the next move.
Here it comes.
The young hedge fund manager that’s responsible for the selloff… he fell for the oldest trick in the book.
And thanks to the history of this market trap, I know exactly where to look next.
Situational Awareness
This collapse didn’t come from penny stocks and it wasn’t some offshore scheme.
It happened in the same AI sector that every talking head called a lock.
The fund held $45 billion in leveraged positions at the start of July. And it barely topped $10 billion by the end of the month…
But the trade thesis wasn’t necessarily wrong. The leverage was.
Leopold Aschenbrenner was fired from OpenAI in 2024 and wrote a 165-page essay about artificial intelligence.
His argument was simple. Smarter models need more chips, more memory, more power, and more data centers.
And he built a fund on the idea, calling it Situational Awareness.
The fund grew to $45 billion in leveraged positions, and Aschenbrenner posted gains north of 1,000% in two years.
Then July 2026 came…
AI infrastructure stocks rolled over as investors started asking when all that spending turns into revenue.
His long bets fell. His short bets against software names like Adobe went the wrong way at the same time.
Both sides of the setup failed at once.
And he was running as much as 400% leverage.
Prime brokers Bank of America, Goldman Sachs, and JPMorgan scrambled to cover the margin calls. When the cash ran out, the entire book went to Citadel.
He might have called the correct direction over the long run. But he couldn’t survive the short-term drawdown from the margin calls.
Here’s the part that should stop you cold: this is the exact same issue that wrecks regular traders.
Never trade with borrowed money.
Don’t use leverage on these setups. Only trade with money you can afford to lose.
Aschenbrenner fell for the oldest trick in the book. He went too big, too fast.
Now his slip-up points me straight to my next trade…
Where The Leverage Hides Next
The iShares Russell 2000 ETF (NYSE: IWM) is up 19.1% year to date.
It ran to nearly $300 in June and has ground sideways in a tight channel ever since.
The recent pop on Monday, August 3, came after the newest Iran truce headline.
Traders bought the peace.
But I’m not buying it.
Look at what sits inside the Russell 2000: biotech, regional banks, REITs, small software. Every one of those groups runs on borrowed money and borrowed faith.
I suspect small caps have leverage buried in them. And leverage is exactly what this market is attacking right now.
A small cap dump could be sitting right behind this rally.
Here’s the alert I sent on Monday:
BUY IWM 8/4/26 $295 PUTS — TARGET $290
As always, book some money at 100% gains.
A short-dated put will turn a small move in the shares into a magnified move in the contract. That’s the asymmetry I’ve banked on my entire career.
Remember, the volume is still thin in early August. The big money doesn’t come back until the fall surge. So keep your size small. Mark your levels and let the setup come to you.
Once we reach the fall, the momentum will come back and these plays will grow simpler/more powerful. Prepare for those setups!
Follow the biggest stories in the market and trade with the sentiment.
Stay Street Smart,
Jeff Zananiri
*Past performance does not indicate future results, Not typical.
