What Can Situational Awareness’s Collapse Teach Investors?

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The spectacular fall of AI-focused hedge fund Situational Awareness was the talk of Wall Street last month after it lost $35 billion in value within a matter of days. Its 25-year-old founder, Leopold Aschenbrenner, was once hailed as an ‘AI prodigy’.

It’s the latest example of a ‘shooting star’: a fund or manager that attracts attention with spectacular returns, only for the winning streak to suddenly come crashing down.

So why do investors keep falling for shooting stars?

As Jason Zweig from The Wall Street Journal explains,

• Extreme returns often prompt us to seek an equally extraordinary explanation. It’s more satisfying to believe we’ve found an investing genius than to chalk spectacular performance up to luck, randomness, or excessive risk.
• But Zweig argues that extraordinary short-term results are difficult to sustain and shouldn’t automatically be treated as proof of exceptional skill.

Our take? There’s nothing wrong with paying attention to a manager with an impressive track record. But extraordinary returns should probably prompt more questions, not fewer. How were those returns generated? How much risk was involved? And is there a reason to believe they’re repeatable?

There will always be another hot fund, stock, or investing “genius” promising extraordinary returns. The hard part is remembering that an impressive founder and a great year don’t necessarily make a great investment. And if you’re still wondering why investors fall for the same stories, read The Psychology of Bubbles: Why Investors Keep Falling for the Same Old Cons.