AI Hedge Fund Near-Collapse Sparks Fears of Past Crashes

This year’s long, scorching summer has inevitably stirred memories of 1976, when Britain sweltered through a heatwave, tried to tune out its economic troubles and sang along as Elton John and Kiki Dee topped the charts with Don’t Go Breaking My Heart.

But the summer that feels more relevant now is not that sepia-toned moment. It is 2007 — and the comparison is far less comforting.

What makes the latest turmoil at hedge fund Situational Awareness so unsettling is the echo of July 2007, when two Bear Stearns hedge funds imploded. At the time, the episode looked contained. In hindsight, it was one of the clearest early warnings of the 2008 global financial crisis.

Those Bear Stearns funds had piled on debt to wager on mortgage-backed derivatives. When the bets unraveled, the damage spread to the parent bank, which ultimately vanished into JPMorgan in a rescue takeover led by chief executive Jamie Dimon.

This time, the rescue has come from Citadel, the powerhouse run by billionaire hedge fund titan Ken Griffin. It has stepped in to support Situational Awareness, a fund that was placing heavily leveraged bets on artificial intelligence — today’s dominant market obsession.

The Securities and Exchange Commission, Wall Street’s chief regulator, has now issued subpoenas to some of the banks that helped finance those trades. The parallels with the pre-crisis era should not be overplayed, and no one should rush to treat this as a certain sign of wider disaster.

Still, the episode raises an uncomfortable question: why were major Wall Street institutions so willing to bankroll huge, leveraged wagers by a hedge fund founded by a 24-year-old former AI researcher?

Here’s another ominous thought. In 2008, there was a high degree of international cooperation between central banks and governments, with the US playing a pivotal role. The current occupant of the White House seems incapable of constructive relationships and is a promoter of chaos, not calm.

He wantonly alienates even the friendliest of allies, Canada, with his tariff onslaughts. He has provoked Beijing with his latest threats of sanctions on Iran and its trading partners.

Investors are heading into assets such as bitcoin and gold in a so-called ‘debasement trade’, signifying loss of confidence in the dollar and a fear of inflation. Worries are bubbling up over rising US government debt, unsustainable fiscal policy and there are concerns the Federal Reserve’s independence is under threat.

Which is why there is such deep scepticism about US Treasury Secretary Scott Bessent’s efforts to keep interest rates low by buying up long-term bonds. Can Bessent beat the bond markets? Very probably not. Back in 1992, the current US Treasury chief was working for George Soros, the man who broke the Bank of England on Black Wednesday, so he already knows that perfectly well.

Stars and yikes

Natwest’s move back into the US is a modest one, so it is no doubt irksome to be suspected of plotting a Fred Goodwin-style folie de grandeur.

Observers can hardly be blamed for it, though, considering the track record. RBS, the predecessor of today’s NatWest, bought a string of US banks through its New England offshoot Citizens in the 1990s and early 2000s.

Goodwin, the chief executive who drove RBS to the brink of ruin, acquired Greenwich Capital, one of the big casualties of the US sub-prime meltdown, through RBS’s takeover of NatWest.

It was the deal for Netherlands bank ABN Amro that was the catalyst for RBS’s downfall. Yes, this was all quite a long time ago now. Paul Thwaite, the current chief executive, bears very little resemblance to Fred the Shred.

But with a horrible history like that, investors have a right to be wary.

NEET crisis

Unsurprising that a third of employers have cut back on entry-level jobs for those aged 16-24 in the past 12 months.

Labour elder statesman Alan Milburn is due to publish his final report on young people not in education, employment or training (NEETs) next month. Unless he addresses the ballooning costs and risks to employers of hiring a young person, it is unlikely to have much effect.

The cost of employing a 21-year-old is up 27 per cent in three years and 86 per cent in a decade, according to calculations by entrepreneur and NEETs campaigner Christopher Nieper.

New worker rights mean taking on a youngster is an expensive gamble many employers feel it is hard to afford.

Chancellor John Healey should cut employers’ National Insurance contributions in the Budget, as the CBI and others have said. He should also introduce a skills tax incentive to encourage firms to hire apprentices.

As for the NEETs themselves, they face despair by a thousand bots as their applications are thrown out by AI.