In this week’s video, I break down the importance of the unwind of Situational Awareness, a fund with a reported $45 billion in positions, and why my experience with LTCM, the 2007 quant unwind, and Archegos tells me this was likely a cleansing event. The Goldman Sachs VIP index of crowded hedge fund positions fell 12% relative to the S&P in a single month, worse than Lehman, with seven points of that damage occurring in just four days. Tech momentum was down 40% for the month at one point, worse than anything in the dot-com era, all while the S&P closed the month unchanged and the VIX stayed low.
That divergence is the story. Market structure has changed forever: AI is compressing economic time, terminal value is harder to estimate, and factor volatility has moved structurally higher. Optimized portfolios built on past correlations are giving investors a false sense of confidence, and prime brokers won’t allow leverage back to prior levels. Expect more speed crashes, not mean reversion.
Meanwhile, the fundamental case strengthened as sentiment followed price with new narratives. Hyperscaler earnings delivered a combined $1.7 trillion backlog across Amazon, Google, and Microsoft, with every CEO saying the same thing: demand exceeds available compute. I say it every week, compute demand is insatiable. With the thematic portfolio having corrected in both price and time, the risk-reward on the AI trade is meaningfully better than it was in May. Why I believe odds favor a bottom being in place.
Timestamps
- (00:00–02:40) Setup: A brutal July for factors, tech, and hedge funds beneath a flat S&P; why this was likely a cleansing event and why compute demand being insatiable remains the single most important weekly takeaway.
- (02:40–06:17) The damage: Goldman’s VIP crowded-positions index down 12% vs. the S&P, the worst relative month since 2001, exceeding Lehman with the worst four-day rate of change ever, including COVID. FT reports banks demanding additional collateral.
- (06:17–10:49) Situational Awareness unwinds: Citadel buys the portfolio; Millennium also bid. Parallels to LTCM, the 2007 quant unwind, and Archegos once prime brokers start marketing a book, everyone sees the poker hands.
- (10:49–16:51) Anatomy of the panic: billions in SMH puts, record E-mini volume into the close, and momentum factor carnage, tech momentum down 40% YTD, industrial down 32%, sector-neutralized down 21%.
- (16:51–20:30) Structural shift: momentum factor volatility at 45-year highs outside a recession; realized factor vol implies 6–7% daily moves. Re-risking will be slow this vol regime isn’t mean reverting.
- (20:30–26:29) Why it’s permanent: AI is compressing time, bubbles, parabolas, and speed crashes. Terminal value uncertainty drives multiple compression even as S&P earnings grow 20%+. Robinhood’s AI trading agent gives retail quant-level tools.
- (26:29–30:09) The market structure trade: NDX realized vol near lows while factor vol goes parabolic a critical conversation for RIAs and mutual funds with longer time horizons than hedge funds.
- (30:09–41:26) Still a bull market: 67 new S&P highs, broad breadth, follow-through day framework for confirming the low. Combing through the rubble names above rising 200-day averages, including Micron, Marvell, AAOI, and Corning.
- (41:26–47:51) Watch items and fundamentals: CCC spreads diverging from high yield (private credit risk), against hyperscaler earnings showing a $1.7T combined backlog and every CEO Zuckerberg, Pichai, Nadella, Jassy saying demand exceeds compute supply through 2027.
- (47:51–1:01:54) The bigger picture: Anthropic and OpenAI pacing toward $175B in combined revenue; token efficiency as the new moat (the gas-and-cars analogy); DRAM prices still rising weekly; the Fed after Warsh; Kevin Rudd on China; and why the lows from this unwind matter.
