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Flood - Inside the Biggest AI Fund Blowup Ever
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All right, uh Flut, wow, what a day. Thank you for being here. And I don't know if you remember this. This is your first time on the stream since you were shilling hyperliquid at like five dollars in 2024. So welcome back, man.
SPEAKER_00Yeah, that was a pretty legendary podcast where I said, you know, hyperliquid is the only crypto asset that you need to own and pay attention to, and you can just buy and log off. That was obviously uh true. Um, but I victory lapped that one enough. I think more interesting things are happening right now. But uh, but yeah, what's on your mind, man? What do you want to discuss?
SPEAKER_01Um, I also do want to give you credit as a friend of the stream. I have two tweets of yours. We'll get over the glaze session really quickly, but I have two tweets of yours on my trading view. The first one is oil top at the top, and then the second one is memory top at the top. But uh, so congrats. So well done on that. We follow your hyperdash with the glaze, we know what it is. Um, anyways, today's a crazy day. I was covering it live. Situational awareness. Boy Wonder Leopold Ashenbrenner has yeah, he's out. He sold uh completely to Citadel. You understand the intricacies better about this better than I do. Like, can you first just set the stage and break down like what has just happened today? And then we could talk about implications after.
SPEAKER_00100%. So um, all right. So the way that you know trading works um when you're at a hedge fund is that you have a pool of assets. Typically, this is going to be cash or treasuries, and you go to a broker like Morgan Stanley, Goldman, et cetera, and you go to them and you say, Okay, I have this basket of assets and I would like to trade other assets, and I would like exposure to these equities. You can buy them through your brokerage, you can do total return swaps, you can do options, you can do a number of different things. Um, now the reason why you would do this rather than using interactive brokers or something uh, you know, that like us normies use is that you get a tremendous amount of leverage. And you can basically get much higher margin rates, better financing, bespoke products, you can get better execution. There's this entire business at banks and at brokerages, which is basically called their like ATS, their alternative trading systems. And this is where they basically like block trades for you, try and give you tight execution. So it acts as like both leverage supplier, risk manager, and then they have execution service. How much leverage are we? So you can get tremendous amounts of leverage on equities, as equity volatility is typically quite a bit lower than crypto. I mean, we get tremendous amounts of leverage on crypto. We get 100 to 1. I don't know what someone like Leopold would get, but I could you could imagine him getting 10 to 20x leverage on 10, 10, 20 billion dollars. Oh. And the reason why you'd use leverage is you really want to juice returns, right? You really want to um try and use as little capital as possible while keeping it in T-bills for the risk-free rate of return. And then being able to, you know, own equities or have equity exposure that um, you know, essentially allows you to, you know, put on these positions. And if you're a winning trader, you're gonna have more and more capital, you're gonna get more and more cash, and you're gonna continue compounding. Um, essentially, you know, this guy's thesis was like genius. Um, it was kind of infuriating for a long time. And I don't want to grave dance too much. Like my heart goes out to anybody who's experiencing like a large drawdown. I've been there in the past. Um, but you know, this guy's strategy was was genius where he said, okay, AGI is coming. Um, AGI is gonna need a tremendous amount of compute and energy, and um, you know, there's gonna be a ton of infrastructure build, and these equities are not priced properly, and so we can accumulate these very cheap and and they'll reprice significantly. And he was right. He essentially turned $500 million into, I want to say $10 or you know, five to $10 billion. Um, and then he raised more and got his uh AUM up to about $20 billion. And then what was reported was at on July 1st, which was close to the top of the market, it looked like he had a nav, which includes leverage. So nav is different to like AUM or actual LP'd capital. He had a nav that was, you know, in excess of $45 billion. So that was like the exposure of his book. Now, the thing to remember is that um he wasn't just trading private, uh, excuse me, he wasn't just trading public equities. He also had a large private book. So over 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, Hey, I would also like to use this as collateral. And the bank was like, Okay, we can give you 10 or 20% LTV on something like that. Um, and so this is a good way of juicing returns. Like, if I can use, you know, lock type as collateral to then trade and I'm a profitable trader, I'm essentially using like free money to some extent, right? So um, you know, this is a way of juicing returns. This is a way of like how their portfolio is constructed. But you know, modern portfolio theory kind of dictates um, you know, you never really want to be more than like 5% of the average daily volume as a position size on a stock, um, on a single name equity. So, you know, Sandis trades, you know, $10 billion of volume a day, you don't really want to have a position that's larger than $500 million. This is sort of like the rough frame, it's far more complex than this, but this is sort of like the rough framework where if you were starting a fund and you were like, hey, what's like a reasonable risk metric? I would say, okay, uh, your position can't exceed 5% of the average daily volume traded. Okay, right now, when you look at his book, including leverage, it was clear that he was 20% of not the average daily volume, but 20% of the market cap of a lot of these single name equities. So that is like way outside the bands. And the reason why 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 and then you're gonna get adversely selected where liquidity thins because they realize you may be a forced seller, and then the market sort of punishes you. Like markets have an unbelievable way of like punishing people when they smell blood, right? Like if I know that you have a large position in an asset and you're leveraged and you need to sell, well, why would I quote any reasonable price?
SPEAKER_01This happens every time, I feel like they hunt these positions out and then you're stuck.
SPEAKER_00Yeah. Well, think about what finance is, right? Finance is a big poker game. There's a there's money in the middle, everybody contributes money by buying equities, by buying stocks, by buying assets. And then you try and take more money than you put in out by, you know, uh sort of taking your chips off of the table. Now, imagine there's a pile of money and we're all sitting around a table, and suddenly everyone starts rapidly grabbing all of the dollars off of it. It's gonna be much harder for you to grab your initial balance. Like this is how liquidity and how markets function, where when people know that you're a seller or they know that you're really concentrated, it's really easy to figure out what your positioning is and for you know people to really press the market down on you. Now, what was interesting and probably the most interesting thing about situational awareness was Jane Street was an investor. Um, and 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 they had the best performance. Um, and you know, I was sort of like surprised to see Jane Street invest in a you know kind of stock picking, it's clear this Leopold kit had a tremendous amount of alpha that was um, you know, sort of increased by leverage, but I was really interested to see, you know, Jane Street investing, you know, a billion dollars, it was rumored, into situational awareness. And what's even more interesting about that is that when situational awareness was forced to sell their assets, uh, it wasn't Jane Street that bought it. It was actually Citadel. And, you know, if I'm winding down my fund or I'm under duress, right? Like I have a capital call, maybe I get stuck on the wrong side of duration, right? Like I would go to my LPs and I would say, hey guys, like I need capital. You're an investor in this fund, you clearly understand it really well. Um, I need like a bridge loan, or I need some sort of financing, or I need you to buy these assets from me. And presumably, if you're invested in a fund that you know holds these assets, you must think they have some value. But James Street wasn't the buyer, it was actually Citadel. And Citadel, this is kind of Ken's trade. Ken has done this a few times in the past. He bought um Enron's energy trading division in 2001. And then he blew up this natural gas trading firm for $6 billion called Amaranth. And he basically twisted the knife and sort of gutted that firm as well. So Ken does this, and this is like the Citadel trade. This is their signature sharky trade. He's done this also to Cliff Asanus at AQR. There was a big plunk quake in the 2010s where a lot of people were running very similar statistical arbitrage strategies where they all sort of correlated and the market had this sort of like flash crash. And Ken called Cliff Asanus and was like, Hey, you know, I'll basically buy your fund from you. Um, and obviously Cliff said, No, fuck off. But like Ken has a history of doing this where he's known as like the grim reaper, basically. Whoa. Like he like Ken, yeah, yeah, that, you know, you there's a very famous, you know, interview with Cliff Asanis where you know that he he kind of says, Oh, how did you feel when when Ken called you? And he said, you know, I heard the Grim Reaper's sight knocking at my door, and I just kept walking towards the light, and I tried to walk away. So Ken Ken is is known for doing this. Um, and the reason why is like, you know, back to risk management. Modern portfolio theory sort of dictates you have these like rules, and these are like you know, best practices guidelines. But the real reason why all of these firms have really strict risk management is because they are running so levered. Like people look at situational awareness as leverage and they say, oh, like this is you know crazy. This guy was 4x levered long. Well, Citadel probably has, I don't know, 80 billion dollars of AUM, and they're probably 20x leverage. But the difference is that they have extremely tight risk controls and extremely tight constraints that prevent them from you know ideally having you know an event like this where all of their positions are moving against them at once.
SPEAKER_01Wow. Okay, before we talk about the downfall, I'm curious I just love the lore. Where does the situational awareness leap with Ash and Brenner Ascension rank amongst the best sunruns ever before like before today? Before before like through June 28th.
SPEAKER_00Definitely top five traders alive um pre-blow up, just in terms of going from 500 million in in AUM to 45 billion or 500 million to you know 45 billion in nav, like that is a tremendous increase. And he he absolutely could have been the best if he had flipped short or something. If if he had if he had the ability to de-risk his book at the top during this last memory squeeze when we saw the micron blowout earnings, um, this guy probably would have been the best trader of all time because he would have been sitting on billions and billions and billions and billions, you know, 10, 20, 30 billion dollars worth of cash and then been able to buy the blood. And maybe because they knew they were shorting, they could have put on a ton of you know, out-of-the-money put options and then, you know, and then even made money on the short. Now, now, okay. The craziest thing about all of this is like, why did Citadel buy this? Well, one, they thought it was plus EV, right? So they're like, they probably got some sort of discount. They were like, okay, we, you know, look at these assets, it's a momentum basket, you know, they've sold off 30, 40. We probably get a five, I don't know, 10%, you know, mark-to-market discount, just for filling everything and making it easy for Leopold and stuff. You're gonna, you're gonna pay for simplicity and convenience. Okay. Um, but the like S-tier execution, the like if they're really the goats, imagine this was a way of them covering their shorts. Imagine if Citadel was actually net short these names, and then them buying this book, because it was very public. And in traditional finance, all of these firms are able to decode with like a high degree of probability what almost every single trade in the market is. And because Leopold was so concentrated and only holding specific names, and he was not a high frequency trading firm, he was like a long only or like long short fund, it was very easy to understand what this guy owned. And then presumably, if you got access to his investor docs, um, you would know, uh, and it was probably widely circulated. Leopold shopped, uh, I know someone that's an LP in situational awareness. Like he did shop his fund out um quite a bit and ask a lot of different firms to invest. You would know like what stipulations he has around, like, hey, if there's a 30% drawdown, we'll de-risk the book. If there is, you know, um X volatility, we'll de-risk the book. I I don't know. Like, I'm just speculating here, but it's not hard to reverse engineer because of the sheer size. Like, you know, for someone trading under a billion dollars, even with some leverage, it doesn't really matter. Like, you know, Citadel would 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 try to match it to a 13F and they'd say, like, oh, okay, this is just a small fund. But because he was so large in small cap equities, like 100 billion and less, Sandisk was one of his larger positions. Yeah, Bloom. But these, but these are really small companies for, you know, Google's a $4 trillion company, Apple's a $5 trillion company. Like, that's very different to a $100, $200 billion equity, right? Um, and so because Leopold's positions were so large, presumably Ken could have, you know, Ken and and and the and the bandits could have known, like, hey, like we know when this kid's gonna cry uncle. And that's the point where we're gonna be able to have, you know, a forced liquidation to sort of exit into. Um, I don't know if that that would be like the craziest, sharkiest move ever, but that's what finance is is finance is a blood sport, it's a combat sport. You know, for me to make money, someone else loses. And, you know, there was a wealth transfer from people that were short memory to Leopold and people that were Leopold copy traders and people long memory. And then there was a rapid wealth transfer from people long memory to people who were short memory. Um, and uh yeah, that's that's how markets function.
SPEAKER_01Holy fuck. They okay, how so how did this actually work? Like the last four days we're sitting here watching the market memory tick down and tick down and tick down because Leopold Ashabar at his desk with a you know FTT $22 line like waiting, and the banks are calling him. Like, how does this process over the last three, four days actually happen?
SPEAKER_00Yeah, so how does this work? So there's traders at the Goldman broker desk, right? At the trade desk. And you know, Leopold comes to you and he's like, 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, you know, a billion dollars of Bloom, a billion dollars of Sandisc, you know, whatever, whatever he bought, right? I mean, he held Bloom, Sandis, Nebius, all the names that are bouncing today. And Goldman's like, okay, this is pretty fucking crazy. Um, like, that's fine. We'll take your money, we'll place this bet for you. Uh, but like the thesis from Leopold and the and the buy-in, and if you had read his situational awareness essay, was you know, hey, um, I think AGI is coming, it's inevitability, digital God is coming, and these assets are going to be sort of up only in a straight line. And, you know, the the magnitude of investment and scale needed is like way off in what people are currently forecasting and calculating. Now, Goldman is sitting there and probably thinking, hey, these guys are fucking crazy. Um, like this is the stock market, like, you know, markets go up and down. And then, you know, but it worked. And so Goldman's like, okay, this kid, you know, he's he's making billions and billions of dollars. And this has happened a lot. A lot of funds have had crazy, crazy run-ups. And then the market starts unwinding, and Goldman's like, all right, well, Goldman Sachs doesn't lose money. So they go, okay, now you get a margin call. And now it's like, we need you to post another five billion dollars of collateral, not just because markets went down, but also because volatility went up. And so the expected move is no longer.
SPEAKER_01So when they give them the margin call, not to cut you off, they're like, the collateral you've given us is no longer sufficient based on how large your position is. You have to give us more money, or the volatility has gone up, like price has gone down, volatility has gone up, or both have happened. We don't feel comfortable with how much collateral you've posted.
SPEAKER_00Yeah, your ops guy gets a call and probably a few emails saying we need to have an urgent conversation. And you look at the market and you say, Okay, here's your exposure, here's your portfolio. Um, you know, hopefully it's not double-pledged like Arkagos was. That's why Bill Huang went to jail, by the way. Wasn't because he lost money, it was because he borrowed on the same collateral from multiple banks, juicing his leverage, you know, two to three times what other people thought. And so um essentially, like Goldman comes to you and they say, Hey, uh, you know, we're really worried about the exposure here. We need you to post additional collateral. Leopold is like, well, fuck, I don't have the collateral. So that's why that news came out that, hey, he's 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.
SPEAKER_01Yeah.
SPEAKER_00Because 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, right? Let me let me try and front run this guy and short because this guy has a huge position to unwind, right? You get you get stuck. And so, you know, Goldman then goes, All right, like you we need collateral buy, you know, market close. And then Leopold doesn't that aggressive, like today. Oh, yeah, yeah, yeah, yeah, yeah. We need it today. Like we need we need billions of dollars today.
SPEAKER_01And he's like, I don't have any, I have nothing. I've no, I have no dollars.
SPEAKER_00Yeah, and and so you call your LPs like Jane Street and and all the stuff, and you go, hey, Jane, like I need I need five billion dollars. And Jane goes, fuck off. We're actually probably on the wrong side of this too, because they were investors in situational awareness. So they at least somewhat, you know, and it was very profitable to trade these momentum names, right? Like, 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 James Street probably said, fuck off. Um, 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 um, you know, DE Shaw, they call Hudson River Trading, and they say I jump, you know, I don't really know.
SPEAKER_01Because there's only a couple guys that can fill this, 10 guys, like how it's not that many that can put this money up, right?
SPEAKER_00Well, there's there's a there's a bunch of different um, you know, wealthy people in the world, but like this Bezos isn't gonna pick up the phone for this, right? Like that's like that's not in his wheelhouse. Like, you know, 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. And these guys have almost like more cash than they know what to do with, right? Um, and so they they go to them and they're like, hey, you know, here's the deal. And then Citadel, uh, Millennium, though those were the only two people who I know were in the process. Citadel, Millennium, then race, and they try and forecast and they say, okay, um, you know, what's the price of this? What price should we offer? And then basically best bid wins, right? And so let's just say that was 10% under market. So Citadel wires $10 billion to, you know, Mr. Leopold. Well, to Goldman, actually, right? To Goldman wires $10 billion to Goldman. And then um, you know, Goldman releases the securities to their account. Uh, and you know, 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 like risk limits or or the guidelines that Goldman set for them. And so imagine you're trying to compute the value of this portfolio while it's swinging five and 10%. During an during an FOMC meeting. Yeah. So like, you know, best bid. And it it's also like you're so you have to sign an NDA to do this, right? And you're not allowed to insider trade. But like, you know, like who's refereeing this? Right. Like, you know, like listen, um, you're like if if Ken is calling you, you're in a really bad spot. And word gets out fast in in finance. Like people talk, you know, um, and rumors are fine to trade on. Um, you're not supposed to trade on, you know, obviously direct information. That's that's illegal because it's non-public, but you know, you can hear a rumor about something and and it's secondhand information, and that's totally fine. Um, but uh, but yeah, you know, the the art of this is Citadel is so good at systematically going into something and pricing it and having the balls to say, all right, I'll bid this. Uh seems seems good. I'll bid it. Um, and they've clearly made a tremendous amount of money because all of those names are up 30, 30 percent.
SPEAKER_01Okay, I know you probably don't want to tinfoil hat this, so go as far as you want, but I'm curious, like you know, this is Citadel's trade, as you as you say, how long hypothetically would something like this be in the works? Because you know, Citadel has this sort of bizarre publication comes out on Tuesday that you know, we think Warsh is gonna hike, and everyone's like, wait, wait, wait, what the fuck? And 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 in selling, I don't entirely know, start to like scream Bloom is crushed, Sandis is crushed, Nebius is down 20%. Like, what is the manufacturing in the background that hypothetically could be going on here? And how long would that have been in the works by someone like a Citadel?
SPEAKER_00Well, I mean, look, if I'm buying a house, I'm not gonna talk about any of the positives of the house. I'm gonna try and argue a case for why my price is fair. Oh, I heard gunshots in the neighborhood, and you know, and the fence is a little messed up, and oh, you know, there might be some structural issues. Like, you're gonna say everything possible to drive the market down. I mean, this is the same thing Ackman did where, you know, he went on CNBC and he was COVID was crying. Yeah, yeah. And he was, you know, talking about how disastrous COVID is gonna be. And then in the meantime, he was actually covering his shorts and flipping long. Like, there's nothing again, like, is it a little bit shisty? Sure. But like, okay, if I know that a fund is stuck and I know that someone's leveraged, and I have the size to do it, like, why wouldn't you press the market down? Wow. Because they're gonna be far more agreeable when Goldman is about to say, listen, we can dump this into the market. And they go, no, no, no, no, no. Like, let's find a bidder and let's get this cleanly off our books and go. I mean, Goldman would never really dump it out of the market. That would that would incur quite a bit of losses. Um, but but you know, yeah, I mean, listen, like Ken is not a nice guy. You don't make $50 billion by like having the best interest. I mean, more probably 80, 100 billion. You you don't you don't make you you don't become the GOAT by like not sharking people. So yeah, I would do everything possible to get as much information as possible, understand every single thing that this guy owned. Like, it's it's like you're playing poker, and you know, the the fish has all of the chips, and you're like, okay, I'm gonna study every single thing that this guy does, all of his strategies, and then I'm gonna play a style of poker to try and take all of his money, right? Like, that's exactly what finance is. Like, this guy was the big fish at the table. But like, listen, um, 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. Like, Leopold's gonna be fine. Um, the question is like, will he have clawbacks on his carry? But like, oh no, boohoo. Instead of him making a billion, he makes like 200 million. Like this, this kid made a tremendous amount of money. Like the people laughing at him, like, that's why it's not really fair to grave dance. He's done exceptionals. Um, but it's it's an important thing where like leverage is often the thing that kills you, it's the thing that makes you, and it's the thing that kills you. Like, we almost never lever a fund. It would have to be like a a once-in-a-lifetime event for us to even exceed like 2x leverage on a directional position for our for our gross book. Like, there's just no need. Like, you you know, market. I don't know. It's like my I have this like tattooed in my mind. It's like markets always go up more than you expect, and and they go down way more than you expect, right? Like they like think about Bitcoin. Like, when when you first got into Bitcoin, did you think it would go to a hundred thousand dollars? Number is not like no way, no way. And then guess what? From you know, a hundred thousand, it's it's gone all the way down to 60. And then, you know, more importantly, from 70k or whatever it was in 2021, it went all the way down to 18. Like, I would have I would have never expected it to, you know, retrace like almost 80% because of FTX and stuff. So, you know, listen, like um leverage is leverage is the killer, right? You he was right, he was completely right. These names have gone up thousands of percent, but uh he got a little greedy at the top, and you know, that happens. And you know, you feel this kid has never had a drawdown. Like, this is probably the first drawdown he's ever experienced. Um, and he didn't have you know a tremendous amount of trading and finance knowledge. I don't really know who works at situational awareness, like I assume they're not the top-tier fonts. Um, 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.
SPEAKER_01Right. So, what's the game theory of your Ken Griffin in Citadel? Like, uh they bought presumably bought everything 10 give or take under market, and then I mean Bloom Energy is up 25, Sandis, 25, Shaw, Micro, uh, all these names, SK Heinnix, 20. Like, you're up a fucking lot. How long are you in these positions for? And how do you think about that?
SPEAKER_00It's impossible to know without understanding the composition of their entire portfolio. Got it, right? So, like they may have said, you know what, we're gonna sell a lot of our Nasdaq position, or we're gonna sell some of these hyperscaler positions, and then we're gonna buy these momentum names because they've come down so much, and then eventually we'll rebalance our portfolio to whatever we think is optimal, right? And they're trading all the time 24-7, 365. Got it. And uh a $10 billion position is large because of the market cap of these names. Like these names are not um, you know, massive companies. So, you know, owning a billion dollars of Bloom Energy is actually a lot. That would be single digit percentage of market cap, right? But yeah, but um, you know, Citadel has hundreds of billions of dollars of equities, so like this slots right in. They probably made some movements, and then it's kind of fucking business as usual, like they'll rebalance out of the positions and go back to their you know optimal position sizing, right? They just they just got a cheap price.
SPEAKER_01How is Goldman Sachs not just sliming everybody? Like they know what everybody needs at all times.
SPEAKER_00Uh I mean Goldman they just Goldman has had like 20 losing trading days on their desk this year, they're gonna make eight billion dollars. Like, yeah, they they are tremendously informed about the market, and they would never front run and back run a client. Like, there's a lot of regular, like you would never go to the broker that's sliming you, but like, do they know what's gonna happen? And do they do they have a good understanding of like compositional, you know, compositional stuff of people's portfolios, net position of of retail versus institutional, like they have a lot of information that other people don't. And whenever you have asymmetric information, you are able to potentially make trades that are far more plus EV than the market thinks. And yeah, Golden makes a tremendous amount of money. Like, here, here's here's a key example, right? Okay, if you place an order to buy QQQ, and I'm a market making firm and it's payment for order flow, I'm not allowed to then go buy QQQ and then sell it back to you. You're not allowed to get Medvd, right? You're not allowed to get fine. Oh, okay, I think that is illegal, but I can trade Nasdaq futures because that's an entirely different product. Got it. So that is sort of the, and again, this isn't my world. I'm not claiming to be an expert. Um, like this is above my pay grade, but this is sort of the way that you know modern finance functions is there's people who have strategies, they come to the market, they run it up, and then the market has, you know, the has the ability to punish them. But you know, there were a lot of firms that were on the losing side, retail traders as well, who shorted memory. Like we were underwater on memory shorts for probably like six weeks this year. Um, and we averaged up like that was game.
SPEAKER_01Six weeks as well, by the way. Painful short.
SPEAKER_00Yeah, yeah, yeah. Where it's ripping 20% every day. But like we just had this thesis that these things were a bit overheated. And also, this is where like game selection, venue selection makes things a lot more comfy. Like, we were being paid 40% on average to be short these names on HIP3, right? So if you went and you shorted on IBKR, you pay a borrow rate to short a stop. It costs you money. If you buy a put option, you're paying Theta, which is the time decay of the option. We were short on HIP3 and we were being paid funding. Now you have squeeze risk, you have like weird price jump risk, maybe hyperliquid could get hacked, you have counterparty risk.
SPEAKER_02Yep.
SPEAKER_00So that's what you're being compensated for, but we were being paid to be short these names. Um, and you know, we gave ourselves a large margin of error and we didn't use any leverage. I mean, you're always levered a little bit when you're short because of the way that a short functions, but it was like not a large percentage of like our overall fun. It was like 10 a 10% position.
SPEAKER_01Okay, I have like two questions for you, and I'll let you go. This is generational. Um, first question is I like I don't know, I've always been curious about this idea of like the news or the outcome was you know written in the charts and things start to roll over and then they go, and then the news comes out. And whether it happened because the charts or whether the charts happened because the news, whatever it is. But um, I mean, I have two lines on my uh trading view. One is the oil top, which is like less relevant, but you sniped it. But the second one was memory, and you were pretty vocal about this. And at the time, like, yeah, fine, things were euphoric and overextended, but it didn't just go. And you were vocal about this for multiple weeks. I'm short memory, I'm short memory, memory top, memory top, memory top. Like, do you think it was topping because guys like Leopold were being hunted? Do you think they're being hunted because it was topping? Like, how how and why did this sort of play out the way that it's played out?
SPEAKER_00Um the thesis was one like memory, and and Kyle was far more involved in this trade than I was. But if I had to like architect his thesis, he was like, Hey, look, memory and hardware has typically been a kind of terrible business. Historically, it's been a terrible business. It's experiencing the mother of all squeezes, and part of its gut feeling as well, where you're just like, hey, these markets are up 2000%. Like, surely it's not a crazy trade to think about shorting them. Um, and the other thing for us was, and this was the component of like why I was bought into this thesis was I looked at Leopold's portfolio. I looked at the size of the equities that he was trading, and I looked at the size of his fund and how much of the market he was. And then also the follow-on effect of people copy trading him because he had made so much money, retail traders copy trading him, other hedge funds copy trading him because they know he's going to buy and push the market up further. So they try and front run that or they try and tail that, right? Because they know presumably he's not really a seller. Um, you know, he had a a long-term thesis on this. And you just the market is getting kind of overextended. Like, also, I also like this is gonna kind of it's gonna sound shitty, but like crypto people don't have any alpha in equities, like equities are a extremely difficult and hyper-efficient game with the smartest people in the world playing. And a lot of people on crypto Twitter are like, look at Micron's PE ratio, and I'm like, guys, this is this is fucking crazy. Like, there's no way that you think because you put the 13F or excuse me, you put the like 10Q into Chat GPT and you said, like, what is the PE ratio that you think you have more alpha than like people doing semiconductor research and you know, like Jane Street and all these friends, like it was just like, okay, like when crypto, unfortunately, people are quite late. Um, you saw this with gold, you saw this with oil, and you're seeing this again with memory. When I see people posting a lot of PL posting about how this is the craziest run ever, and you're just seeing everybody long memory, you're kind of like, Well, who's left to buy? Who's left to buy right? Like, like who, like who's coming in and who is like gonna buy a hundred billion dollars of micron over the next you know, few months? It it's it's nobody like everybody when everybody is long and micron is the most traded stock in the market for weeks and weeks on end. At a certain point, the smart money has gotten out of their position and sold to the people that are really late. Yeah, and that more often than not tends to be crypto people, unfortunately.
SPEAKER_01I'll give you uh for my last question, I'll give you credit because yeah, the OG stream viewers know you're in here a lot, and it was we were watching Micron earnings, which is like the greatest earnings of all time. Yeah, you were saying something along the lines of like watch the lack of volatility and like this at the top, and it like wasn't at first, and we were kind of you know, fuck you, flood, fucking hair, and then you know, it it plays out the way it plays out. My last question for you is on collateral damage and what happens from here. So there's been a couple posts, I think, from TradFi talking about some other funds are potentially in trouble. This is a little bit of like a weird day. Like I wasn't that in tune with the markets when the whole 3AC FTX situation happened, but it was it was pretty dark because there was extreme collateral damage and everything was limit down. Now everything's like limit up, which makes it like there's some irony behind it. But I'm curious about collateral damage on other funds. How do you think that will like how they're allocated, how that will play out, and then views on the market short to medium term from here. I know you close a lot of your memory shorts.
SPEAKER_00Yeah, yeah, and we closed too early. Like, I didn't know Leopold was getting liquidated. Like, if if I knew that he was gonna be liquidated and I had heard some rumor, I mean I knew he was in trouble, um, just because it's easy to reverse what his uh holdings were, but I I didn't know how levered he was. Like, that's just information you're not you're not prevy to. Um the uh sorry, give me one second. Um what I think happens from here is uh there's two frames of reference. Like one, maybe AGI is up only, and this is a temporary pit stop. Like we just had to kill some retards, and um, you know, then it's gonna resume up only. We washed out a lot of the leverage, and now the smart money is rebuying. The other frame of reference is like equities aren't really down that much. Like, pull up the SP 500 chart, like 3% of CH. It looks like it's a tiny blip. Like the correction hasn't really started. And actually, what happened after three arrows got liquidated was we had a massive bounce. After 1010, we had a massive bounce. You know, things were up 30, 40 percent, and then they get hammered later. So I don't know, like I don't really have a strong bias. Like, we're about 50 cash, so we're pretty risk-off for us as we're typically close to fully deployed, like running less than 10 cash. Um, but I think patience is gonna be rewarded here. I think that there's 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 red, I buy next day it's up 8%. Like that's been the correct thing, and these people have made a lot of money, but that means they also have a lot of money to lose.
SPEAKER_01Yep.
SPEAKER_00Right. Um, so what I think is that you're gonna be rewarded for patience because there's two things that peaks. One, when earnings reports come out and they are black, they are like, you know, booming, like they are they are fucking blockbuster. The market when sentiment is turned says, Oh, this is a high watermark, it's down only from here. And then if you so that was like Micron, right? Where wow, this was a one of one, it can't, it literally can't get better. Like it micron would be the biggest company in the world if it continued growing at the pace that it's grown. Second is SK Heinex, where people say, Oh, we're expecting you know blockbuster earnings, and then you miss. So it's almost like you can't win once market segment, once market set sentiment has really turned, where you beat too big and the market actually punishes you because they say this is the top, or you miss and you get fucking hammered, like SK Heinex did. And it's no, it's no wonder that SK Heinex jammed that $27 billion offering in. But the number one thing that we are looking at and we are thinking about is that there has been a trillion dollars of spend by hyperscalers. And I don't know where you can point to me in the financials that there are massive revenue increases other than cloud, which is recursive to some extent. But I don't see where there is some line item that says, hey, we were able to have 70% cost reduction, or Instagram reels are now 30% more profitable this quarter. There is very little show for the spend, right? Like people are like, why did Meta get hammered? Well, Meta is growing 28% and they're spending to the point where they're now free cash flow negative. Google is the same, right? Yeah. Now, the the bull case is that all of these hyperscalers are smarter than we are, and they've compounded capital at very high rates, and they all feel like this is existential, so maybe this is it. But the like bare case or like rational case is show me the money, right? Like you've said there's gonna be crazy gains from AI, there's gonna be massive improvements to the business. We'll be able to have massive uh efficiency gains by firing employees or one employee being able to do the work of 10, right? But that just hasn't happened yet. Hasn't happened at all. Best kept secret, right? At there, like show me the money. Like, show me where any company other than anthropic and open AI has had massive revenue increases that weren't cloud. Because cloud is a little bit scary because it's recursive, right? Because they invest in cloud, then they sign a deal with anthropic, and then they book it, or open AI, they book it as revenue. And it's like, okay, well, yes, this is like sort of revenue. And so that is what we're paying attention to, where I just think as time progresses and there isn't much to show for it in the short term, markets will continue to get punished for raising cap apps. And so that's something where it's like, hey, you know, you can you can just be patient. Like, I'm not worried about missing a 7% move in Nasdaq up. I'm worried about buying the minus 10% of the minus 30% debt. That's what I'm worried about.
SPEAKER_01And that was, I think that's really good perspective. My last one for you is the obvious elephant in the room is views on crypto, and you're still short hyperliquid on the hyperdash that is now labeled flood. And it's been an insane trade. When does that close? And do you think I don't know, Bitcoin lows are in? Like, are you still optimistic? For a while you were buying a ton of Bitcoin, you're tweeting about it. I don't know where you're at right now.
SPEAKER_00Um, yeah, I mean, we still own Bitcoin. We're about we we only own Bitcoin, hype, um, and then some some stocks, but I I I shouldn't really talk about stocks because it's like regs and stuff. Uh, there's other assets we're looking at that are interesting. Um, but the way we think about hype is like the way we would think about any asset, which is like how fast is it growing?
SPEAKER_02Yeah.
SPEAKER_00Um, if hype starts growing really fast, then we will buy more of it. If growth sort of stalls, then we'll continue, you know, maybe managing our risk. And also when you think about hype, um, I'm obviously up quite a bit on my hype. 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 then you also get paid the funding payments because hype basis is typically paying short set, like you know, mostly the crypto, you know, baseline funding. So I get paid to hedge. And like if I'm bearish, that feels like a pretty nice trade and it's very tax efficient. So like I may have like I may be like short hype, but that doesn't mean I'm like bearish hype. It just might be an okay use of my cash, right? Like the P like I own hype and and I'm short some against it, and and I have other wallets as well. Like it, you know, it's it's not like I'm not psyched about making them like it's not I'm I didn't make a million dollars shorting. It's just sort of like me protecting the US dollar value of my portfolio and being paid to do so.
SPEAKER_01Tell you what, scary to see. Um, flood, you're the goat, man. This was uh an important emergency stream. I uh you're one of the best, dude. I appreciate you uh you coming on. I think it was a proper number two on a whim. So yeah, chat loves you. I love you. You're the goat, man. Thanks for coming on.
SPEAKER_00Yeah, thanks for having me.
SPEAKER_01All right, dude. See you soon, man. Have a good one.
SPEAKER_00Peace.