Jim Cramer discovered leverage works both ways. Situational Awareness—a hedge fund with a name that suggests zero situational awareness—blew up because they borrowed money to make bets and the bets went bad. Cramer called this a hidden risk. The risk of borrowing money to lose money faster. Hidden like a neon sign.
The forced unwind means their broker made them sell everything at the worst possible time because that's what brokers do when you owe them money you don't have. This magnified the losses. Losses get magnified when you use other people's money to make them. Groundbreaking stuff from the guy who told everyone to buy Bear Stearns a week before it collapsed.
Retail traders watched this unfold and learned nothing. They're currently opening new margin accounts because a guy on Twitter with a laser-eyed profile picture told them leverage is how the rich get richer. He's right. The rich get richer by lending money to idiots who think they're about to get rich. The idiots get margin calls.
Situational Awareness joins the proud tradition of hedge funds with ironic names that imploded. Next up is probably something called Risk Management Capital or Prudent Strategies LLC. They'll lever up thirty-to-one on some trade that works until it doesn't. Then Cramer will explain how nobody could have seen it coming.
The hidden risk wasn't hidden. Borrowing money to invest means you lose faster when you're wrong. Every retail trader knows this eighteen months after they learn it the expensive way. But hedge fund managers needed CNBC to explain it to them with charts and a guy yelling.
Situational Awareness had neither.
Photo by Markus Winkler on Unsplash
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