Flood - Inside the Biggest AI Fund Blowup Ever
Flood’s core verdict is that Situational Awareness’s AGI thesis was directionally right, but its portfolio construction turned a historic win into a forced sale. He says Leopold Aschenbrenner reportedly transformed roughly $500 million into $5–10 billion, raised AUM toward $20 billion, and by July 1 had NAV exceeding $45 billion, including leverage. Yet some positions allegedly reached 20% of a company’s market cap: “You can be right, and you can make a tremendous amount of money and still end up being wrong.”
The blowup was a liquidity failure accelerated by leverage, falling prices, and rising volatility—not necessarily a rejection of the underlying AI thesis. Flood’s reconstruction has brokers demanding billions in same-day collateral; without enough cash, Aschenbrenner reportedly sought emergency funding before the book was sold to Citadel. Once sophisticated firms detect a forced seller, “markets have an unbelievable way of punishing people when they smell blood.”
Citadel’s reported purchase was the archetypal distressed-portfolio trade: absorb an enormous book at a discount, then potentially profit from the rebound or integrate it into a broader portfolio. Flood uses a hypothetical 10% discount and notes that several names subsequently rallied roughly 20–30%. His more aggressive theory—that Citadel might have used the acquisition to cover shorts or pressed the market beforehand—is explicitly speculation: “That would be, like, the craziest, sharkiest move ever.”
Jane Street’s absence as buyer is one of the episode’s most consequential unanswered questions. It was rumored to have invested about $1 billion in Situational Awareness, yet Citadel—not Jane Street—reportedly acquired the distressed assets. Flood cannot know why, but argues an informed LP would ordinarily be a natural source of bridge financing, fresh collateral, or bids for assets it already understood.
Flood’s memory short rested on positioning and market structure more than a precise fundamental catalyst. Hardware had historically been a difficult business, the relevant markets had risen as much as 2,000%, and Aschenbrenner’s buying had attracted retail and hedge-fund copy-traders. When Micron became one of the market’s most heavily traded stocks, Flood’s question was simply: “Who’s left to buy?”
Flood remains deliberately undecided between a washed-out AI bull market and the start of a larger correction. His fund is about 50% cash versus its usual sub-10%, because forced liquidations can produce violent rebounds before later declines. “I’m not worried about missing a 7% move in Nasdaq up. I’m worried about buying the -10% of the -30% dip.”
The larger AI bear case is that roughly $1 trillion of hyperscaler spending has yet to produce clearly identifiable returns outside cloud revenue, some of which Flood considers recursive. The bull case is that sophisticated operators view the investment as existential; the skeptical test is “show me the money”—measurable revenue, margin, or labor-efficiency gains. Until those appear, he expects markets may continue punishing higher CapEx.
1. A brilliant AGI trade grew beyond the market’s capacity to absorb it
Flood reconstructs Aschenbrenner’s ascent as one of the great trading runs: roughly $500 million became an estimated $5–10 billion, AUM rose toward $20 billion, and leveraged NAV reportedly exceeded $45 billion near July 1. Before the reversal, Flood would have ranked him among the “top five traders alive.”
The thesis itself was coherent: AGI was coming, it would require vastly more compute, energy, and infrastructure than markets expected, and the enabling equities were mispriced. Those names subsequently rose by thousands of percent, validating the directional call before leverage invalidated the implementation.
More than 25% of the fund’s LP capital or positions was reportedly Anthropic equity. Flood speculates that this illiquid holding could have supported additional borrowing at perhaps 10–20% loan-to-value, effectively turning private exposure into collateral for more public-equity risk.
Flood’s rough risk benchmark is a position no larger than 5% of average daily volume; Situational Awareness, he says, instead held stakes approaching 20% of market capitalization in some names. That made the book legible, crowded, and difficult to exit discreetly.
2. Margin calls transformed mark-to-market losses into a deadline
Flood’s broker explanation begins with leverage: a fund posts cash, Treasuries, or other collateral and receives financing, execution, swaps, and bespoke exposure from firms such as Goldman Sachs. He could imagine Aschenbrenner receiving 10–20x leverage on $10–20 billion, while a later hypothetical describes 4–5x leverage for buying individual names; he does not present that as the fund’s overall leverage.
As memory and infrastructure names fell, collateral values declined while volatility rose. Both changes would increase the broker’s required cushion, producing the call Flood dramatizes as: “We need to have an urgent conversation”—followed by a demand for billions, potentially by that day’s market close.
The host’s incredulous pushback—could the deadline really be “today”?—gets an unambiguous answer: “Oh, yeah.” Flood says emergency fundraising during a decline usually signals a liquidity crunch because voluntarily selling into weakness advertises distress and invites other desks to short, widen prices, or wait for worse levels.
If fresh collateral never arrived, Goldman could solicit bids from the few firms capable of absorbing the portfolio. Flood knows Citadel and Millennium were reportedly involved; his hypothetical has the winner wiring perhaps $10 billion to Goldman at a roughly 10% discount, with the securities then released to its account.
3. Citadel bought the kind of distress it is built to price
Jane Street was rumored to have invested roughly $1 billion in Situational Awareness, making its failure to emerge as buyer striking to Flood. An LP already familiar with the portfolio would seem a natural bridge lender or bidder, yet the reported rescue came from Citadel.
Flood casts the acquisition as a signature Ken Griffin trade, invoking Citadel’s purchase of Enron’s energy trading division in 2001, its role in the collapse of Amaranth’s natural-gas trading firm, and Griffin’s approach to Cliff Asness during a quant dislocation. His remembered phrase from Asness: “I heard the Grim Reaper’s scythe knocking at my door.”
The conservative explanation is enough: Citadel judged the assets positive expected value, received compensation for speed and certainty, and could slot the positions into hundreds of billions of broader equity exposure. After several names rebounded roughly 20–30%, Flood says Citadel had already made substantial money on paper.
The provocative scenario remains explicitly hypothetical: Citadel may have been short some names, understood Aschenbrenner’s risk limits, and used the forced block to cover shorts or exit. Flood concedes, “I’m just speculating here,” but argues the book’s sheer size made its holdings and potential breaking point unusually easy to reverse-engineer.
4. Leverage made the legend and then set the liquidation price
Flood argues Aschenbrenner might have become the best trader ever had he de-risked during the final memory squeeze, flipped short, or held $10–30 billion of cash to buy the aftermath. Instead, “he got a little greedy at the top” during what may have been his first serious drawdown.
The comparison with Citadel is not low leverage versus high leverage. Flood guesses Citadel may run around 20x on roughly $80 billion of AUM, but with tight diversification, sizing, and risk controls designed to prevent every position moving against it simultaneously.
His lesson is personal rather than triumphalist: “Leverage is often the thing that kills you. It’s the thing that makes you, and it’s the thing that kills you.” His own fund would rarely exceed 2x gross directional leverage, even for what looked like a once-in-a-lifetime setup.
Flood also resists the grave dance. Aschenbrenner was “completely right” about the equities’ upside and likely still earned an extraordinary amount, even if carry clawbacks reduce the result from perhaps $1 billion to $200 million. The failure was survival and sizing, not absence of insight.
5. The memory top emerged when every marginal buyer was already long
Flood credits colleague Kyle with more of the trade’s architecture: memory and hardware were historically difficult businesses undergoing “the mother of all squeezes,” while some markets had gained about 2,000%. That alone made a contrarian short worth considering, though not sufficient for precise timing.
The sharper signal was reflexive positioning. Aschenbrenner’s purchases pushed smaller companies higher; retail copied him, while other funds front-ran or tailed a buyer they believed was structurally unlikely to sell. Eventually Micron dominated trading and crypto traders celebrated public P&Ls—prompting “Who’s left to buy?”
Flood dismisses simplistic equity analysis from crypto participants who fed filings into ChatGPT and cited Micron’s P/E against specialist semiconductor investors. His claim is not that fundamentals were irrelevant, but that late, crowded conviction offered little alpha in a “hyper-efficient game.”
The short was painful for roughly six weeks as names sometimes rose 20% daily. Flood’s fund kept it at a 10% position, used no meaningful leverage, and says it was being paid roughly 40% on average to short these names through HIV-3 rather than paying stock borrow or option theta—accepting squeeze, jump, hack, and counterparty risks in exchange.
6. After the liquidation, the decisive question is whether AI can show the money
Flood offers two live paths: the liquidation merely washed out leverage before “AGI up only” resumes, or the broader correction has barely begun because the S&P 500 remains near its high. Prior liquidations, including Three Arrows and “10/10,” produced 30–40% rebounds before later punishment.
That uncertainty explains the fund’s roughly 50% cash position versus less than 10% normally. Dip-buying and weekly options have repeatedly worked, but successful mean-reversion traders now possess more capital to lose if the regime changes; Flood expects “patience is gonna be rewarded here.”
At a sentiment peak, even earnings can become unwinnable: Micron’s blockbuster report was treated as an impossible-to-repeat high-water mark, while SK Hynix was hammered for missing elevated expectations. “It literally can’t get better”—continued growth at Micron’s pace would make it the world’s largest company.
Flood’s fundamental concern is approximately $1 trillion of hyperscaler spending without obvious non-cloud revenue or cost savings. Meta was growing about 20% yet spending toward negative free cash flow, with Google framed similarly. He grants the bull case—these firms are capable capital allocators treating AI as existential—but keeps returning to one demand: “Show me the money.”
His crypto positioning is more nuanced than the visible Hyperliquid short suggests. He still owns Bitcoin and HYPE; against appreciated HYPE, he uses derivatives to protect dollar delta while collecting staking yield—which he says is not taxable in the US—and short funding. “I may be short HYPE, but that doesn’t mean I’m bearish on HYPE.”
Full transcript
All right. Flood, wow, what a day. Thank you for being here. I don't know if you remember this, but this is your first time on the stream since you were shilling Hyperliquid at around $5 in 2024. Welcome back, man.
Yeah, that was a pretty legendary podcast where I said Hyperliquid was the only crypto asset that you needed to own and pay attention to, and that you could just buy it and log off. That was obviously true, but I victory-lapped that one enough. I think more interesting things are happening right now. What's on your mind, man? What do you want to discuss?
Yeah.
What do you want to discuss?
I also want to give you credit as a friend of the stream.
Yeah.
We'll get over the glaze session really quickly, but I have two of your tweets on my TradingView. The first one is “Oil top” at the top, and the second one is “Memory top” at the top. Well done on that. We follow your Hyperdash; we know what it is.
Anyway, today's a crazy day. I was covering it live: Situational Awareness. Boy wonder Leopold Aschenbrenner is out. He sold completely to Citadel. You understand the intricacies of this better than I do. Can you first set the stage and break down what has just happened today? Then we can talk about the implications.
100%. The way trading works when you're at a hedge fund is that you have a pool of assets, typically cash or Treasuries, and you go to a broker like Morgan Stanley or Goldman Sachs and say, “I have this basket of assets, and I would like to trade other assets. I would like exposure to these equities.”
You can buy them through your brokerage, you can do total return swaps, you can do options, and you can do a number of different things. The reason you would do this rather than using Interactive Brokers or something that we normies use is that you get a tremendous amount of leverage. You can get much higher margin rates, better financing, bespoke products, and better execution.
There's this entire business at banks and brokerages called their ATS, or alternative trading systems. This is where they block trades for you, trying to give you tight execution. It acts as a leverage supplier, risk manager, and execution service.
How much leverage are we talking?
Which is perfect. You can get tremendous amounts of leverage on equities, as equity volatility is typically quite a bit lower than crypto. We get tremendous amounts of leverage on crypto—we get 100-to-1. I don't know what someone like Leopold would get, but you could imagine him getting 10–20× leverage on $10–20 billion.
Whoa.
The reason you use leverage is to juice returns. You want to use as little capital as possible while keeping it in T-bills for the risk-free rate of return, and then be able to own equities or have equity exposure that essentially allows you to put on these positions.
If you're a winning trader, you're going to have more and more capital, you're going to get more and more cash, and you're going to continue compounding. Essentially, this guy's thesis was genius. It was kind of infuriating for a long time, and I don't want to dance on his grave too much. My heart goes out to anybody experiencing a large drawdown. I've been there in the past.
But this guy's strategy was genius. He said, “AGI is coming. AGI is going to need a tremendous amount of compute and energy, there's going to be a ton of infrastructure build, and these equities aren't priced properly. We can accumulate them very cheaply, and they'll reprice significantly.”
He was right. He essentially turned $500 million into, I want to say, $10 billion—or, you know, $5–10 billion. Then he raised more and got his AUM up to about $20 billion.
What was reported was that, on July 1st, which was close to the top of the market, it looked like he had a NAV in excess of $45 billion. NAV includes leverage, so it's different from AUM or actual LP capital.
Got it.
That was the exposure of his book. The thing to remember is that he wasn't just trading public equities; he also had a large private-equity book. More than 25% of the LP capital, or the positions at the fund, was in Anthropic equity, which is obviously illiquid.
But if he was sharp—and I'm sure he was—he probably went to the bank and said, “I would also like to use this as collateral.” The bank said, “Okay, we can give you 10–20% LTV on something like that.”
This is a good way of juicing returns. If I can use locked HYPE as collateral to trade, and I'm a profitable trader, I'm essentially using free money to some extent. This is how their portfolio is constructed.
Modern portfolio theory dictates that you never really want to be more than 5% of the average daily volume as a position size in a single-name equity. SanDisk trades $10 billion of volume a day, so you don't really want to have a position larger than $500 million. This is the rough framework, although it's far more complex than that.
Uh-huh.
If you were starting a fund and asked what a reasonable risk metric was, I would say, “Your position can't exceed 5% of the average daily volume traded.”
Okay.
Right? When you look at his book, including leverage, it was clear that he was 20% of the market cap—not the average daily volume—of a lot of these single-name equities.
Dude—
That is way outside the bands. The reason you have these constraints around position sizing is that when the market moves against you very quickly, people may know that you have a large position. Then you're going to get adversely selected: liquidity thins because they realize you may be a forced seller, and the market punishes you.
Markets have an unbelievable way of punishing people when they smell blood. If I know that you have a large position in an asset, you're leveraged, and you need to sell, why would I quote any reasonable price? I'm just going to keep walking the book down.
This happens every time, I feel like. They hunt these positions out, and then you're stuck.
Yeah. Think about what finance is. Finance is a big poker game. There's money in the middle. Everybody contributes money by buying equities, stocks, and assets, and then you try to take more money out than you put in by taking your chips off the table.
Imagine there's a pile of money and we're all sitting around a table. Suddenly, everyone starts rapidly grabbing all of the dollars off it. It's going to be much harder for you to grab your initial balance. This is how liquidity and markets function: when people know that you're a seller or that you're really concentrated, it's easy to figure out your positioning and for people to press the market down on you.
What was interesting, and probably the most interesting thing about Situational Awareness, was that Jane Street was an investor. Jane Street is probably the top trading firm in the world. Arguably, it could be Citadel Securities, but Jane Street certainly dominated last year, as it had the best performance.
I was surprised to see Jane Street invest in a stock-picking fund. It's clear this Leopold kid had a tremendous amount of alpha that was increased by leverage. I was really interested to see Jane Street investing a rumored $1 billion into Situational Awareness.
Whoa.
What's even more interesting is that when Situational Awareness was forced to sell its assets, it wasn't Jane Street that bought them. It was actually Citadel.
If I'm winding down my fund or I'm under duress—if I have a capital call, or maybe I get stuck on the wrong side of duration—I would go to my LPs and say, “Hey, guys, I need capital. You're an investor in this fund, so you clearly understand it well. I need a bridge loan or some sort of financing, or I need you to buy these assets from me.”
Presumably, if you're invested in a fund that holds these assets, you must think they have some value. But Jane Street wasn't the buyer. It was Citadel.
This is kind of Ken's trade. Ken has done this a few times in the past. He bought Enron's energy trading division in 2001, and then he blew up this natural-gas trading firm called Amaranth for $6 billion. He basically twisted the knife and gutted that firm as well.
Ken does this, and this is the Citadel trade.
This is their signature sharky trade. He's done this also to Cliff Asness at AQR. There was a big quant quake in the 2010s where a lot of people were running very similar statistical arbitrage strategies, and they all sort of correlated. The market had this sort of flash crash.
Ken called Cliff Asness and was like, “Hey, I'll basically buy your fund from you.” Obviously, Cliff said, “No, fuck off.” But Ken has a history of doing this, where he's known as the Grim Reaper, basically.
Whoa.
There's a very famous interview with Cliff Asness where he was asked, “How did you feel when Ken called you?” And he said, “I heard the Grim Reaper's scythe knocking at my door, and I just kept walking towards the light, and I tried to walk away.”
Ken is known for doing this. The reason why is, back to risk management, modern portfolio theory dictates that you have these rules, best practices, and guidelines. But the real reason why all of these firms have really strict risk management is because they are running so leveraged.
People look at Situational Awareness's leverage and say, “This is crazy. This guy was 4x leveraged long.” Well, Citadel probably has, I don't know, $80 billion of AUM, and they're probably 20x leveraged.
Wow.
The difference is that they have extremely tight risk controls and extremely tight constraints that prevent them from, ideally, having an event like this where all of their positions are moving against them at once.
Wow. Okay, before we talk about the downfall, I'm curious. I just love the lore. Where does Leopold Aschenbrenner's ascent rank amongst the best run-ups ever, before today? Before June 28th?
Definitely top 5 traders alive pre-blowup, just in terms of going from $500 million in AUM to $45 billion in NAV.
Top 5?
That is a tremendous increase. He absolutely could have been the best if he had flipped short or something. If he had the ability to de-risk his book at the top during this last memory squeeze, when we saw the Micron blood earnings, this guy probably would've been the best trader of all time.
He would've been sitting on billions and billions and billions and billions, maybe $10 billion, $20 billion, or $30 billion worth of cash. Then he would've been able to buy the blood, and maybe because they knew they were shorting, they could've put on a ton of out-of-the-money put options and even made money on the short.
Now, the craziest thing about all of this is, why did Citadel buy this? One, they thought it was positive expected value. They probably got some sort of discount. They were like, “Okay, we look at these assets. It's a momentum basket. They've sold off 30%, 40%. We probably get a 5%—I don't know, 10%—mark-to-market discount just for filling everything and making it easy for Leopold and stuff.” You're going to pay for simplicity and convenience.
Okay.
The S-tier execution, if they're really the GOATs, would be if this was a way of them covering their shorts. Imagine if Citadel was actually net short these names, and then they bought this book.
Because it was very public, in traditional finance, all of these firms are able to decode, with a high degree of probability, what almost every single trade in the market is.
Mm.
Because Leopold was so concentrated and only holding specific names, and he was not a high-frequency trading firm—he was a long-only or long-short fund—it was very easy to understand what this guy owned.
Presumably, if you got access to his investor documents, you would know. It was probably widely circulated. Leopold shopped his fund around quite a bit and asked a lot of different firms to invest. I know someone who's an LP in Situational Awareness.
You would know what stipulations he had around, “If there's a 30% drawdown, we'll de-risk the book. If there's a certain level of volatility, we'll de-risk the book.” I don't know. I'm just speculating here.
Wow.
But it's not hard to reverse-engineer because of the sheer size. For someone trading under a billion dollars, even with some leverage, it doesn't really matter. Citadel and all of the other firms would be able to see your flow, but they'd be like, “This is sort of not uninteresting.” They'd try to match it to a 13F and say, “Okay, this is just a small fund.”
But because he was so large in small-cap equities—companies with $100 billion and less in market capitalization—SanDisk was one of his larger positions.
Bloom. NBS.
Yeah, Bloom. But these are really small companies. Google is a $4 trillion company. Apple is a $5 trillion company. That's very different from a $100 billion or $200 billion equity.
Because Leopold's positions were so large, presumably Ken and the bandits could have known, “We know when this kid's going to cry uncle, and that's the point where we're going to be able to have a forced liquidation to exit into.”
I don't know. That would be the craziest, sharkiest move ever, but that's what finance is. Finance is a blood sport. It's a combat sport. For me to make money, someone else loses.
There was a wealth transfer from people who were short memory to Leopold, people who were Leopold copy traders, and people who were long memory. Then there was a rapid wealth transfer from people who were long memory to people who were short memory. That's how markets function.
Holy fuck. Okay, how did this actually work? The last 4 days, we're sitting here watching memory tick down and tick down and tick down. Is Leopold Aschenbrenner at his desk with an FTT $22 line, waiting, and the banks are calling him? How does this process actually happen over the last 3 or 4 days?
How does this work? There are traders at the Goldman broker desk, at the trade desk.
Uh-huh, uh-huh.
Leopold comes to you and says, “Hey, I just got another $10 billion of cash from Jane Street, or $5 billion of cash from Jane Street and all these guys. I want that 4x, 5x leverage you give me, and I want to buy a billion dollars of Bloom, a billion dollars of SanDisk,” whatever he bought. He held Bloom, SanDisk, NBS, and all of the names that are bouncing today.
Goldman is like, “Okay, this is pretty fucking crazy. That's fine. We'll take your money. We'll place this bet for you.”
The thesis from Leopold, and the thesis in his Situational Awareness essay, was, “I think AGI is coming. It's inevitable. Digital God is coming, and these assets are going to be up only in a straight line. The magnitude of investment and scale needed is way beyond what people are currently forecasting and calculating.”
Goldman is sitting there and probably thinking, “These guys are fucking crazy. This is the stock market. Markets go up and down.”
But it worked, and so Goldman is like, “Okay, this kid is making billions and billions of dollars.” This has happened a lot. A lot of funds have had crazy, crazy run-ups.
Then the market starts unwinding, and Goldman is like, “All right, Goldman Sachs doesn't lose money.” So they say, “Now you get a margin call.” Now it's like, “We need you to post another $5 billion of collateral,” not just because markets went down, but also because volatility went up. The expected move is no longer—
So, like, when they give him the margin call, they're saying, “The collateral—
Yeah.
—you've given us is no longer sufficient based on how large your position is. You have—
Yeah.
—to give us more money, or volatility has gone up. Price has gone down, volatility has gone up, or both have happened. We don't feel comfortable with how much collateral you've posted.”
Your ops guy gets a call and probably a few emails saying, “We need to have an urgent conversation.” You look at the market and say, “Okay, here's your exposure, here's your portfolio.”
Hopefully it's not double-pledged like Archegos was. That's why Bill Hwang went to jail, by the way. It wasn't because he lost money—
Oh.
—it was because he borrowed against the same collateral from multiple banks, juicing his leverage 2 to 3 times what other people thought.
Essentially, Goldman comes to you and says, “We're really worried about the exposure here. We need you to post additional collateral.” Leopold is like, “Fuck, I don't have the collateral.”
That's why the news came out that he was raising funds. You're not raising funds when the market's going down because you're having a good time.
You're raising funds because you have a liquidity crunch or a call, and you presumably don't want to sell your assets. Because when you sell your assets and the market's moving against you, it exacerbates the move.
Yeah.
Because now all of these very sophisticated trading firms see you selling and they're like, "Oh, this guy is liquidating. Let me quote even wider. Let me try and front-run this guy and short him because this guy has a huge position to unwind." You get stuck.
And so Goldman then goes, "All right, we need collateral by market close." And then Leopold doesn't have it.
Oh, it's that aggressive, like today?
Oh, yeah. We need it today. We need billions of dollars today.
And he's like, "I don't have any. I have nothing. I have no dollars."
Yeah. So you call your LPs, like Jane Street and all this stuff, and you go, "Hey, Jane, I need $5 billion." And Jane goes, "Fuck off. We're probably on the wrong side of this too." Because they were investors in Situational Awareness, so they at least somewhat understood what was happening.
And it was very profitable to trade these momentum names. Not only are they making money directionally, long-short market making, but then also market making the options because the implied volatility was so high. There was so much retail interest. These names were moving a tremendous amount, and so Jane Street probably said, "Fuck off."
And then Goldman goes, "Okay, markets are closed," which is sort of nice in this instance, and then they run a process. They call Millennium, they call Citadel, they call D. E. Shaw, they call Hudson River Trading—
Because there's only a couple of guys that can fill this—10 guys. It's not that many people that can pull this money up, right?
Well, there's a bunch of different wealthy people in the world, but Bezos isn't going to pick up the phone for this, right? That's not in his wheelhouse. Berkshire Hathaway could have been a call.
Yeah, you call all the big guys with big pools of capital who you know always have cash. Citadel always has cash. Jane Street always has cash. Millennium always has cash. These guys have almost more cash than they know what to do with.
And so they go to them and they're like, "Hey, here's the deal." Citadel and Millennium were the only two who I know were in the process. Citadel and Millennium then race and try to forecast and say, "Okay, what's the price? What price should we offer?"
And then basically, best bid wins, right? So let's just say that was 10% under market. Citadel wires $10 billion to Goldman on behalf of Leopold, and then Goldman releases the securities to their account.
To Goldman, yes.
Wires $10 billion to Goldman, and then Goldman releases the securities to their account. This is hard to do because the markets are closed. You don't know what the move is going to be tomorrow, but you have some expected-value calculation.
And then it's even harder if this liquidation happened while the market was going on. That is entirely possible because we don't know where Leopold actually tripped his risk limits or the guidelines that Goldman set for him. Imagine you're trying to compute the value of this portfolio while it's swinging 5% to 10%—
It's just drilling.
—during an FOMC meeting. So, best bid.
And it's also like—you have to sign an NDA to do this, right?
Okay.
And you're not allowed to insider trade, but who's refereeing this? Listen, if Ken is calling you, you're in a really bad spot, and word gets out fast in finance. People talk.
Rumors are fine to trade on. You're not supposed to trade on direct information. That's illegal because it's non-public. But you can hear a rumor about something, and it's secondhand information, and that's totally fine.
The art of this is that Citadel is so good at systematically going into something and pricing it, and having the balls to say, "All right, I'll bid this. It seems good. I'll bid it." And they've clearly made a tremendous amount of money because all of those names are up 30%.
Okay, I know you probably don't want to put a tinfoil hat on this, so go as far as you want, but I'm curious. This is Citadel's trade, as you say. How long, hypothetically, would something like this be in the works?
Citadel has this bizarre publication that comes out on Tuesday saying, "We think Warshaw is going to hike." And everyone's like, "Wait, what the fuck?" It's also at this precarious time where forward guidance is gone. It's his second FOMC, the first one where he could presumably do something, and then the markets start to panic.
In particular, the Leopold names, which maybe that was him selling—I don't entirely know—start to scream. Bloom is crushed, SanDisk gets crushed, Nebius is down 20%. What are the machinations in the background that could hypothetically be going on here, and how long would that have been in the works for someone like Citadel?
Well, look, if I'm buying a house, I'm not going to talk about any of the positives of the house. I'm going to try and argue a case for why my price is fair. "I heard gunshots in the neighborhood. The fence is a little messed up, and there might be some structural issues." You're going to say everything possible to drive the market down.
This is the same thing Ackman did. He went on CNBC and—
About COVID, was crying.
Yeah, and he was talking about how disastrous COVID was going to be, and in the meantime, he was actually covering his shorts and flipping long.
Wow.
There's nothing against it. Is it a little bit shady? Sure. But if I know that a fund is stuck, I know that someone's leveraged, and I have the size to do it, why wouldn't you press the market down?
Wow.
Because they're going to be far more agreeable when Goldman is about to say, "Listen, we can dump this into the market." And they go, "No, no, no, let's find a bidder and get this cleanly off our books."
Goldman would never really dump it out of the market. That would incur quite a bit of losses. But, yeah, listen, Ken is not a nice guy. You don't make $50 billion by having everyone's best interests in mind. Probably more—$80 billion, $100 billion. You don't become the GOAT by not sharking people.
So, yeah, I would do everything possible to get as much information as possible and understand every single thing that this guy owned. It's like you're playing poker and the fish has all of the chips, and you're like, "Okay, I'm going to study every single thing that this guy does, all of his strategies, and then I'm going to play a style of poker to try and take all of his money." That's exactly what finance is.
This guy was the big fish at the table. But, listen, it's a good lesson for everybody that you can be right, and you can make a tremendous amount of money, and still end up being wrong.
Leopold's going to be fine. The question is whether he'll have clawbacks on his carry. But, oh no, boo-hoo—instead of making $1 billion, he makes $200 million. This kid made a tremendous amount of money. The people laughing at him—that's why it's not really fair to dance on his grave. He's done exceptionally well.
Of course.
But it's an important thing: leverage is often the thing that kills you. It's the thing that makes you, and it's the thing that kills you.
We almost never lever a fund. It would have to be a once-in-a-lifetime event for us to even exceed 2× leverage on a directional position for our gross book. There's just no need.
Markets always go up more than you expect, and they go down way more than you expect. Think about Bitcoin. When you first got into Bitcoin, did you think it would go to $100,000?
No, that's nuts.
No way.
Yeah.
And then, from $100,000, it's gone all the way down to $60,000. More importantly, from $70,000 or whatever it was in 2021, it went all the way down to $18,000.
Yeah.
I would have never expected it to retrace almost 80% because of FTX and stuff. So, listen, leverage is the killer. He was right.
He was completely right. These names have gone up thousands of percent, but he got a little greedy at the top, and that happens. You feel for him—this kid has never had a drawdown. This is probably the first drawdown he's ever experienced.
He didn't have a tremendous amount of trading and finance knowledge. I don't really know who works at Situational Awareness. I assume they're not top-tier quants. They were probably people who really believed in AGI, really believed that the thesis was right, and they were right for a long period of time.
They were right. So what's the game theory if you're Ken Griffin at Citadel? They presumably bought everything 10%, give or take, under market, and Bloom Energy is up 25%, SanDisk is up 25%, Micron—all these names.
Yeah.
SK Hynix is up 20%. You're up a fucking lot.
Yeah.
How long are you in these positions for, and how do you think about that?
It's impossible to know without understanding the composition of their entire portfolio.
Got it.
Right? They may have said, “You know what? We're going to sell a lot of our Nasdaq position,” or, “We're going to sell some of these hyperscaler positions, and then we're going to buy these momentum names because they've come down so much, and eventually we'll rebalance our portfolio to whatever we think is optimal.” They're trading all the time, 24/7, 365.
Got it.
A $10 billion position is large because of the market cap of these names. These are not massive companies, so owning $1 billion of Bloom Energy is actually a lot. That would be a single-digit percentage of the market cap.
It's—
Right? But Citadel has hundreds of billions of dollars of equities, so this slots right in. They probably made some movements, and then it's kind of fucking business as usual.
They'll rebalance out of the positions and go back to their optimal position sizing. They just got a cheap price.
How is Goldman Sachs not just sliming everybody? They know what everybody needs at all times.
Yeah.
Or are they?
I mean, Goldman is—
They just are.
Goldman has had around 20 losing trading days on their desk this year. They're going to make $8 billion. They are tremendously informed about the market, and they would never front-run or back-run a client. There are a lot of regulations. You would never go to the broker that's sliming you.
But do they know what's going to happen, and do they have a good understanding of the composition of people's portfolios—the net position of retail versus institutional? They have a lot of information that other people don't, and whenever you have asymmetric information, you're able to potentially make trades that are far more plus-EV than the market thinks. Goldman makes a tremendous amount of money. Here's a key example.
Okay.
If you place an order to buy QQQ, and I'm a market-making firm using payment for order flow, I'm not allowed to then go buy QQQ and sell it back to you. You're not allowed to get MEV'd. You're not allowed to get front-run.
Oh, okay. I see.
That is illegal. But I can trade Nasdaq futures because that's an entirely different product.
Got it.
So that is—
Got it.
That's sort of the—
Again, this isn't my world. I'm not claiming to be an expert. This is above my pay grade. But this is sort of the way modern finance functions: there are people who have strategies, they come to the market, they run it up, and then the market has the ability to punish them.
There were a lot of firms on the losing side, as well as retail traders, who shorted memory. We were underwater on memory shorts for probably 6 weeks this year.
Wow.
We averaged up. We gave ourselves—
That was a brutal 6 weeks as well, by the way. Painful 6 weeks short.
It was. Yeah, yeah, yeah—it was ripping 20% every day. But we just had this thesis that these things were a bit overheated.
This is also where game selection and venue selection make things a lot more comfortable. We were being paid 40%, on average, to be short these names on HIV-3. If you went and shorted on IBKR, you would pay a borrow rate to short a stock. It costs you money.
Got it.
If you buy a put option, you're paying theta, which is the time decay of the option. We were short on HIV-3, and we were being paid funding. Now, you have squeeze risk, weird price-jump risk—maybe Hyperliquid could get hacked—and counterparty risk.
Yep.
That's what you're being compensated for. We were being paid to be short these names. We gave ourselves a large margin of error, and we didn't use any leverage. You're always levered a little bit when you're short because of the way a short functions, but it was not a large percentage of our overall fund. It was a 10% position.
Got it. Okay, I have 2 questions for you, and then I'll let you go. This is generational.
Sure.
First question is, I've always been curious about this idea that the news or the outcome was written in the charts. Things start to roll over, then they go, and then the news comes out—whether it happened because of the charts or the charts happened because of the news, whatever it is.
I have 2 lines on my TradingView. One is the oil top, which is less relevant—
Mm.
—but you sniped it. The second one was memory, and you were pretty vocal about this.
Mm. Mm.
At the time, fine, things were euphoric and overextended, but it didn't just go down. You were vocal about this for multiple weeks: “I'm short memory. I'm short memory. Memory top, memory top, memory top.”
Mm.
Do you think it was topping because guys like Leopold were being hunted? Do you think they were being hunted because it was topping? How and why did this play out the way it did?
The thesis was, one, memory. Kyle was far more involved in this trade than I was, but if I had to architect his thesis, he was like, “Hey, look. Memory and hardware have typically been a terrible business. Historically, it's been a terrible business. It's experiencing the mother of all squeezes.”
Part of it is gut feeling as well, where you're just like, “Hey, these markets are up 2,000%.” Surely it's not a crazy trade to think about shorting them.
The other thing for us—and this was the component of why I was bought into this thesis—was that I looked at Leopold's portfolio, the size of the equities he was trading, the size of his fund, and how much of the market he represented.
There was also the follow-on effect of people copy-trading him because he had made so much money: retail traders copy-trading him, and other hedge funds copy-trading him because they knew he was going to buy and push the market up further. They tried to front-run or tail that, because presumably they knew he wasn't really a seller.
Got it.
He had a long-term thesis on this. The market was getting overextended.
This is going to sound shitty, but crypto people don't have any alpha in equities. Equities are an extremely difficult and hyper-efficient game, with the smartest people in the world playing. A lot of people on crypto Twitter were like, “Look at Micron's P/E ratio.” I'm like, “Guys, this is fucking crazy.”
There's no way you think that because you put the 13F—or, excuse me, the 10-Q—into ChatGPT and asked, “What is the P/E ratio?” you have more alpha than people doing semiconductor research, Jane Street, and all these firms.
It was just like, okay, crypto people are unfortunately quite late. You saw this with gold, you saw this with oil, and you're seeing it again with memory. When I see people posting a lot of P&L, posting about how this is the craziest run ever, and you're seeing everybody long memory, you're kind of like, “Well, who's left to buy?”
Who's left to buy?
Right? Who's coming in and who's going to buy $100 billion of Micron over the next few months? It's nobody. When everybody is long and Micron is the most traded stock in the market for weeks on end, at a certain point, the smart money has gotten out of its position and sold to the people who are really late.
Yeah.
More often than not, that tends to be crypto people, unfortunately.
I'll give you credit before my last question.
Because the OG stream viewers know you're in here a lot, we were watching Micron earnings, which was the greatest earnings of all time. You were saying something along the lines of, “Watch the lack of volatility. This is the top.” It wasn't at first, and we were kind of like, “Fuck you, Flood, fucking bear.”
Yeah.
And then it played out the way it played out. My last question for you is about the collateral damage of what happens from here. There have been a couple of posts, I think, from TradFi talking about how some other funds are potentially in trouble.
Mm-hmm.
This is a little bit of a weird day. I wasn't that in tune with the markets when the whole 3AC-FTX situation happened, but it was pretty dark because there was extreme collateral damage and everything was limit down. Now everything is limit up.
Mm-hmm.
Which makes it ironic.
Mm-hmm.
But I'm curious about the collateral damage on other funds, how you think that will play out, how they're allocated, and then your views on the market short to medium term from here. I know you closed a lot of your memory shorts.
Yeah. We closed too early. I didn't know Leopold was getting liquidated. If I knew that he was going to be liquidated and I had heard some rumor—I mean, I knew he was in trouble, just because it's easy to reverse what his holdings were—but I didn't know how levered he was. That's just information you're not privy to.
Yeah.
Sorry, give me one second.
No, you're good.
What I think happens from here is that there are 2 frames of reference. One is maybe AGI is up only and this is a temporary pit stop. We just had to kill some retards, and then it's going to resume up only. We washed out a lot of the leverage, and now the smart money is rebuying. The other frame of reference is that equities aren't really down that much. Pull up the S&P 500 chart. It looks like—
3% up from ATH.
It looks like it's a tiny blip. The correction hasn't really started. Actually, what happened after Three Arrows got liquidated was that we had a massive bounce. After 10/10, we had a massive bounce. Things were up 30% or 40%, and then they got hammered later. So I don't know. I don't really have a strong bias. We're about 50% cash.
Okay.
We're pretty risk-off for us, as we're typically close to fully deployed, running less than 10% cash. But I think patience is going to be rewarded here. There are a lot of people who have made a tremendous amount of money buying dips and doing mean reversion and saying, “Oh, if equities are down 2%, I buy weekly options and then I make 500% returns.” Or, “Oh, Micron is red, I buy. The next day it's up 8%.” That has been the correct thing.
Yeah.
These people have made a lot of money, but that means they also have a lot of money to lose.
Yep.
What I think is that you're going to be rewarded for patience, because there are 2 things that happen at peaks. One, when earnings reports come out and they are booming—when they are blockbuster—the market, when sentiment has turned, says, “Oh, this is a high-water mark. It's down only from here.”
Yeah.
So that was Micron, right?
That was Micron.
This was a one-of-one.
How could it get better?
It can't. It literally can't get better. Micron would be the biggest company in the world if it continued growing at the pace that it's grown. Second is SK Hynix, where people say, “Oh, we're expecting blockbuster earnings,” and then you miss. So it's almost like you can't win once market sentiment has really turned. You beat too big and the market actually punishes you because they say, “This is the top,” or you miss and you get hammered like SK Hynix did. It's no wonder that SK Hynix jammed that $27 billion offering in.
Yeah.
The number-one thing that we are looking at and thinking about is that there has been $1 trillion of spend by hyperscalers. I don't know where you can point to me in the financials and show massive revenue increases other than cloud, which is recursive to some extent.
Yep.
I don't see where there is some line item that says, “Hey, we were able to have a 70% cost reduction,” or, “Instagram Reels are now 30% more profitable this quarter.” There is very little to show for the spend. People are asking, “Why did Meta get hammered?” Meta is growing 20%, and they're spending to the point where they're now free-cash-flow negative.
Yeah.
Google is the same.
Google, same thing.
The bull case is that all of these hyperscalers are smarter than we are, they've compounded capital at very high rates, and they all feel like this is existential, so maybe this is it. But the bear case, or the rational case, is: show me the money. You said there are going to be crazy gains from AI and massive improvements to the business. We'll be able to have massive efficiency gains by firing employees, or one employee being able to do the work of 10. But that just hasn't happened yet.
It hasn't happened at all. Best-kept secret, right?
At all. Show me the money. Show me where any company other than Anthropic and OpenAI has had massive revenue increases that weren't cloud. Cloud is a little bit scary because it's recursive. They invest in cloud, then they sign a deal with Anthropic or OpenAI, book it as revenue, and it's like, okay, yes, this is sort of revenue.
Yeah.
That is what we're paying attention to. As time progresses and there isn't much to show for it in the short term, markets will continue to punish companies for raising CapEx. That's something where you can just be patient. I'm not worried about missing a 7% move in the Nasdaq up.
Yep.
I'm worried about buying the -10% of the -30% dip. That's what I'm worried about.
I think that was really good perspective. My last one for you is the obvious elephant in the room: your views on crypto. You're still short Hyperliquid on the HyperDash, which is now labeled Flood. It's been an insane trade. When does that close? Do you think Bitcoin lows are in? Are you still optimistic? For a while, you were buying a ton of Bitcoin and tweeting about it. I don't know where you're at right now.
We still own Bitcoin. We only own Bitcoin, HYPE, and some stocks, but I shouldn't really talk about stocks because of regulations and stuff. There are other assets we're looking at that are interesting. The way we think about HYPE is the way we would think about any asset: how fast is it growing?
Yep.
If HYPE starts growing really fast, then we will buy more of it. If growth stalls, then we'll continue managing our risk. When you think about HYPE, I'm obviously up quite a bit on it. If I sell it, I have to pay quite a bit of tax. So I can hedge it with a derivative, protect my delta, and then I get paid on both sides because you get paid the HYPE staking yield, which is not taxable in the US, and you also get paid the funding payments because HYPE basis is typically paying shorts at mostly the crypto baseline funding.
Cool.
I get paid to hedge, and if I'm bearish, that feels like a pretty nice trade. It's very tax-efficient. I may be short HYPE, but that doesn't mean I'm bearish on HYPE. It might just be an okay use of my cash.
I own HYPE, and I'm short some against it. I have other wallets as well. It's not like I'm not psyched about making money. I didn't make $1 million shorting. It's just me protecting the US-dollar value of my portfolio and being paid to do so.
I'll tell you what, it's scary to see. Flood, you're the GOAT, man. This was an important emergency stream. You're one of the best, dude. I appreciate you coming on. I think it was a proper number 2 on a whim. Chat loves you, I love you. You're the GOAT, man. Thanks for coming on.
Thanks for having me.
All right, dude. See you soon, man. Have a good one. Peace.