Disclosure: Martin Shkreli is currently an active individual investor, and he mentions in the podcast that he holds some AI-related stocks (including Kosha in Japan). He also operates the biotech company DrugDash and runs a subscription-based service. The views in this episode are based on his Wall Street trading experience, but when discussing specific assets, there may be a conflict with his personal investment interests.
On a side note, Martin Shkreli was the notorious "Pharma Bro" who single-handedly disrupted the American pharmaceutical industry and Wall Street. He was convicted of manipulating drug stock prices and sentenced to 7 years in prison. Due to his expertise in leverage, shorting, and regulatory maneuvers, he is the perfect person to dissect the unraveling of this $45 billion AI hedge fund. His perspective, sharp-tongued nature, and understanding of Wall Street's jungle rules far surpass that of ordinary financial commentators.
Key Points Summary
1. The Situational Awareness Fund reportedly used a leverage of around 4x, meaning a 25% drawdown would be sufficient to wipe out the fund's net asset value. When the portfolio value dropped from $1200 billion to around $900 billion, the $35 billion capital might have shrunk to $500 million, triggering a forced takeover by the prime broker.
2. Market participants had already started "shooting against the fund" earlier this week, selling off overlapping holdings with the target fund and shorting its key assets to actively hasten the fund's collapse. This is a classic Darwinian move on Wall Street.
3. The three main bidders for the assets were Jane Street, Millennium, and Citadel, with Citadel ultimately winning the bid. Shkreli believes that Citadel may receive an immediate mark-to-market gain of $30-40 billion after taking over, provided they can smoothly absorb these positions.
4. Shkreli argues that the macro narratives (war, oil prices, open-source anxiety, peak capital expenditures of hyperscale cloud providers) are merely noise. The real price determinant is the buying and selling intentions of the marginal 5% of traders and the leverage multiples they employ.
5. Leopold had previously worked at FTX until the day before its collapse. He should have learned risk management lessons but re-entered the market in less than two years with higher leverage and a more concentrated approach. Furthermore, he broke the hedge fund tradition of not investing in private market equities and heavily invested in assets like Anthropic with very poor liquidity.
6. A large New York hedge fund once rejected Leopold during fundraising, citing "lack of experience, unable to invest"; later, Leopold achieved a 20x return, making the other party feel ashamed, but after this round of liquidation, it was "to some extent proven right again".
7. Shkreli used the Kelly Criterion to explain: even with a 60/40 edge in win rate, as long as the position size exceeds the optimal scale of 2-10 times, the simulated result will always trend to zero.
Highlights Summary
"I was talking to a friend about Long-Term Capital Management, Amaranth, and other famous blow-up events triggered by liquidity issues. The situation of this Situational Awareness definitely ranks up there."
"Once the market knows that a certain fund has to liquidate, the most advantageous action for others is to sell off positions that overlap with it and start shorting everything it holds. This is very brutal, very Darwinian, but very common on Wall Street."
"Those are not the key points. What really matters is the buying and selling behavior of buyers and sellers. Smart money enters early, continues to buy after the price rises; then less smart people see the uptrend and want to get in too. The weakest hands are often those who buy at the top and are also the most likely to panic sell first. Every bubble is more or less the same: euphoria, peak, and then everyone panics simultaneously. Fundamentals hardly work at such moments."
"Ken wants to be the one everyone looks for when things go wrong. Buffett is old and doesn't want to deal with this kind of activity. But Citadel did this during the Amaranth blow-up."
"Hedge funds wearing a venture capital hat to do private equity usually don't end well. Looking back over the hedge fund history of the past 50 years, very few have been able to do well on both sides."
"Leopold didn't do anything wrong; the leverage level had already determined the outcome. At the slightest breeze, he had to liquidate, with no other ending, which is very unfortunate."
"If you are going to hold these stocks, you have to make sure you can hold on until it drops to a 2x P/E ratio or even a 1x P/E ratio without flinching. The only person in the world capable of holding $100 billion and not flinching is probably only at Citadel's level."
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1. Opening: The Wildest Month in Wall Street History
Shkreli stated at the beginning of the podcast that the past 24 hours had been one of the craziest experiences in his personal investment career. He mentioned that he and his circle of friends had been hearing rumors about the Situational Awareness fund's troubles since last week, which gradually became clearer on Thursday night and Friday morning. He likened this event to the famous liquidity-driven blow-ups such as Long-Term Capital Management (LTCM) and Amaranth, believing it was "absolutely on par".
What impressed him was that the hedge fund had done quite well in terms of confidentiality. However, the market was alert, and some large trading counterparties may have started positioning themselves as early as Monday or Tuesday. He quoted his former colleague Cramer as saying, this is called "shooting against a fund," which means that when a fund is forced to liquidate, the optimal strategy for others is to sell positions that overlap with it and simultaneously short everything it holds. This is not a moral issue; it is purely game theory.
II. Root Cause: Not war, not oil, but marginal traders and leverage
The host put forward a series of macro narratives to probe: US-Iran war? Oil prices? Open-source AI anxiety? Peak capital expenditure by hyperscale cloud providers? Shkreli denied each one.
"None of those are fundamental. What really matters is the buying and selling behavior of buyers and sellers." He described the classic path of bubble psychology: smart money enters first, continues to buy as the price rises; latecomers see a 400% return and fear of missing out drives them to follow suit; the weakest hands buy at the top and are the first to panic sell. Shkreli self-deprecatingly said, "People like me started buying near the top. I thought memory was great, bottleneck trading was great."
He emphasized that at such moments, fundamentals hardly matter because the price is determined by only the marginal 5% of traders. And the problem lies precisely in the fact that these 5% are operating at 3 to 4 times leverage. According to market rumors, SALP was using about 4 times leverage, "a 25% drawdown can get you liquidated."
III. The Mathematics of Four-Times Leverage: From $450 Billion to $500 Million
Shkreli used a set of simplified numbers to help the audience understand the brutality of leverage. Assuming the fund had $350 billion in capital, plus approximately $100 billion in Anthropic private equity (as understood at the time), the book value was about $450 billion. Operating at 4 times leverage means the total position value was about $1.2 trillion.
When the position value falls by 25%, that is, the total position value drops from about $1.2 trillion to about $900 billion, the book value shrinks from $350 billion to about $50 billion, or even lower. Once the net value approaches or falls below zero, the main brokers (Goldman Sachs, Bank of America, etc.) will intervene. They are not there to save you; they are there to take over the assets and sell them off quickly because "their board would rather realize a $10 billion loss than risk a $50 billion loss."
There were rumors that Leopold urgently contacted about 10 institutions over the weekend to try to sell Anthropic equity to replenish liquidity, with a quote valuing Anthropic at about $1.1 trillion. However, in the end, the right to dispose of the public book fell into the hands of the Prime Broker, and Citadel, as the buyer, took over the game at a significant discount.
IV. Hunting Mechanism: When the Market Smells Blood
Shkreli detailed the operational difficulties of unwinding a large position. You can't just click "Sell" like on Robinhood when dealing with a $100 billion position.
The standard process is to call up Goldman Sachs, have them act as an intermediary to find a buyer. However, the intermediary is obligated to "advertise" the order to the market, disclosing their market maker identifier (like GSCO) and the asset for sale. Once the news is out, the entire Wall Street knows that there's a "big seller."
Several things happen at this point: small funds might quietly short the asset, trying to front-run the big seller; institutions genuinely interested in buying also hesitate, thinking, "If his position is really huge, I need to be cautious in getting involved." The holder list is so short that when you call Fidelity, ask index funds, they all say they're not selling, "then it must be him."
What's even more brutal is that when the market realizes someone has to sell $100 billion, "there will be trillions of dollars standing in his way, just waiting to see him panic." It's not just Leopold's $100 billion; multiplied by 5 to 10 times is the total amount of capital in the market doing the same trade. Shkreli believes that while the most intense liquidation phase may have passed, over the next few weeks, several funds will continue to be exposed with losses of 30% to 40%.
V. Citadel's Entrance: Ken Griffin Wants to Be "That Guy"
In the asset bidding phase, Jane Street, Millennium, and Citadel were brought into the closed circle. Shkreli heard that Millennium did bid, but Citadel's terms were better.
He commented on Ken Griffin's motivation: "Ken wants to be the guy everyone goes to when things go wrong." Buffett is old and doesn't want to deal with this mess, but Citadel has played a similar role in crises like Amaranth's natural gas blowup and Enron's collapse. This is a highly expensive brand investment that "might only be used once every ten years, but when needed, can make $5 billion to $10 billion for free."
Surprisingly, Citadel is still slightly positive this month, Shkreli believes this is likely because they were already hedged. More importantly, as a major client of Citadel's prime brokerage, they hold a vast amount of global trading volume data, giving them a natural advantage in information and execution speed.
6. The Prime Broker Is Not Your Friend
Shkreli explained the prime broker's business model: they make money on financing spreads. If you use 4x leverage, the prime broker may earn 400 to 800 basis points of "free income." So they love leverage.
However, the prime broker's internal risk department is looking at another set of metrics: too much concentration is not good, and a large short position is also not good (the GameStop lesson). What they find most troublesome is private market equity. Hedge funds making venture investments, in Shkreli's view, receive a "kiss of death." East Coast hedge funds investing in the private market typically can't compete with West Coast dedicated venture capital.
Leopold's situation is particularly tricky: Anthropic is private market equity, and he is as close to this company as possible (his fiancée is the chief of staff to Anthropic CEO Dario Amodei). Although Anthropic's demand has surged 100x in the past six months, when cash is needed, "you can't press the sell key."
Rumors had it that on Monday or Tuesday, someone tapped Leopold on the shoulder and said, "Your margin is looking a bit thin, can you top up with a few tens of billions," but things developed too quickly with no time at all.
7. Can Leopold Make a Comeback?
The host asked Leopold if he could rebuild his career. Shkreli believes he absolutely can.
He used Peter Thiel as an example: Thiel's macro hedge fund Clarium Capital performed poorly later on, but he later pivoted to Founders Fund, becoming one of the most successful VCs in history, and then relaunched Thiel Macro. Shkreli said Leopold could start over for a few years, learn from his mistakes, "no one denies he's a genius."
However, this process will inevitably be accompanied by humiliation. Two months ago, he was the world's largest hedge fund, and now, two months later, he has been forced to liquidate, "this is an extremely devastating moment." In addition, the clawback provisions in the hedge fund industry may complicate matters. Many institutions now require fund managers to return the previously earned 2% management fee and 20% performance fee in the event of a significant drawdown.
Shkreli also mentioned that Leopold's delayed 13F submission once sparked market speculation, "everyone thought he had negotiated some confidentiality agreement, but it turns out he just didn't get around to it." This indirectly reflects the immaturity of a young fund in operations and communication.
Lesson Eight: A Lesson for Everyone - Kelly Criterion and Position Sizing
At the end of the podcast, Shkreli shared his own position sizing simulator based on the Kelly Criterion.
The Kelly Criterion proves that if your win rate advantage is 55%, the optimal position size is 10% of your capital. However, in reality, almost every trader is betting with a position size 2 to 10 times larger than the optimal scale. He demonstrated with the simulator: even if you have a 60/40 win rate advantage, as long as you overbet, the result will always be zero.
He recalled having the opportunity to observe a low-key hedge fund manager who worked at SAC Capital (now Point72) for many years after leaving Tiger Cub. This person managed three to four billion dollars, almost all of which was his own money. 80% to 90% of the funds lay in cash all year round, only engaging in small trades. He had never experienced a losing quarter in over 20 years, with an annualized return of 20% to 30%.
"And then the first thing I did with the capital was to leverage it up 8 times. The dumbest thing in the world."
Shkreli said this is ultimately a psychological issue. Hedge funds are the most glamorous, painful, and terrifying business in the world. You think you are the master of the universe, but in reality, you wake up at 3 a.m. to check the Korean stock price, then wake up again at 6 a.m. to see what has happened in the world. "You basically haven't done anything; you're just playing a high-risk game of crazy poker."
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