A hedge fund worth $45 billion at its height sold nearly its entire stock portfolio to Citadel Securities last week. As recently as a month ago, the fund was up 439 percent on the year, according to an investor letter from its founder, 24-year-old former OpenAI employee Leopold Aschenbrenner. But its portfolio, aggressively invested in companies tied to the artificial intelligence industry, dropped 67 percent in July.
Hilariously, the fund was called Situational Awareness.
Last week, the tech-heavy Nasdaq saw its second correction of the year, named for a drop of at least 10 percent from its peak. SpaceX has lost the equivalent of the entire value of Tesla since its post-IPO high in June, and it’s still dropping. For whatever reason—the rise of cheaper and more flexible Chinese AI models, the recognition that U.S. AI companies simply aren’t generating enough revenue to justify skyrocketing capital expenditures, the general economic drag from Trump’s tariffs and wars, or the increasingly operatic financial maneuvers to keep the wheels moving—the shine is way off the AI rose for investors.
The problem is that the industry is bound so tightly with the stock market that a change in feeling from AI investors could be all it takes to generate a market-wide crash, as we’re seeing to some degree. In other words, if AI is propping up the economy, who is propping up AI?
The answer, extrapolating from a fascinating new paper about private credit and the life insurance industry, could be the U.S. taxpayer.
Private credit is private equity’s $3 trillion financing arm. They make largely unregulated, relatively high-risk, relatively complex and opaque loans, mostly to their own portfolio companies. Private credit is entangled, maybe more than the rest of Wall Street, in AI mania. For example, in the mid-2010s private equity bought up hundreds of software-as-a-service providers, and its private credit affiliates made thousands of loans to them, only to see these portfolio companies buckle recently as AI replicated their tasks.