Compiled & Organized: Deep Tide TechFlow

Hosts: John Coogan & Jordi Hays

Guest: Martin Shkreli (Shkreli previously worked at a hedge fund under Cramer, later founded multiple hedge funds such as Elea Capital, MSMB Capital, and biopharmaceutical companies like Retrophin and Turing Pharmaceuticals, experiencing the 2000 internet bubble and multiple institutional liquidation cycles)

Core Topic: Review of the Situational Awareness Fund (SALP) liquidity crisis, hedge fund leverage mechanisms, forced liquidation processes by prime brokers, market hunting psychology

Source: TBPN Podcast--"Martin Shkreli Breaks Down the Collapse of Situational Awareness"

Broadcast Time: 2026-07-30

Conflict of Interest Statement: Martin Shkreli is now an active individual investor, mentioning his holdings of some AI-related stocks (including Kosha in Japan) during the podcast. He also operates the health tech company DrugDash and runs a paid subscription service. The views expressed in this episode are based on his Wall Street trading experience, but when involving specific securities, they may coincide with his personal holdings and interests.

Incidentally, Martin Shkreli is the "financial bad boy" who single-handedly stirred up the U.S. pharmaceutical industry and Wall Street, convicted of manipulating pharmaceutical stock prices and sentenced to 7 years. Because he himself is the "grandmaster" of leveraging, short selling, and playing games with regulators, his breakdown of the collapse of this 45 billion AI hedge fund provides a sharp perspective and a deeper understanding of Wall Street's jungle rules than that of ordinary financial commentators.

Key Points Summary

• The Situational Awareness Fund leveraged about 4 times, meaning a 25% drawdown was enough to bring the fund's net value to zero; when the value of holdings dropped from 120 billion dollars to about 90 billion, the 3.5 billion dollars principal may have shrunk to 500 million, triggering the prime broker's forced takeover.
• Market participants began "shooting against the fund" as early as Monday and Tuesday of that week, i.e., selling overlapping holdings with the target fund and shorting its holdings, actively accelerating the collapse of the fund, a classic Darwinian operation on Wall Street.
• The three major buyers of auctioned assets were Jane Street, Millennium, and Citadel, with Citadel ultimately winning; Shkreli believes that Citadel, after taking over, might gain an immediate paper profit of 3 to 4 billion dollars, provided they can smoothly digest these positions.
• Shkreli considers the macro narratives (war, oil prices, open-source anxiety, peak capital expenditure of massive cloud vendors) to be noise, stating that what actually determines prices are the buying and selling intentions of the marginal 5% of traders, as well as their leverage multiples.
• Leopold had previously worked at FTX until the day before its collapse, should have learned risk control lessons, yet returned to the market with higher leverage and a more concentrated approach in less than two years; he also broke the hedge fund norm of not dealing in private market equity by heavily investing in illiquid assets like Anthropic.
• A large New York fund rejected Leopold during fundraising, citing "lack of experience, unable to invest"; later, after Leopold generated a 20-fold return, they felt ashamed, but after this round of liquidation "was somewhat proven right".
• Shkreli used the Kelly Criterion to demonstrate: even with a 60/40 edge in win rate, if the position exceeds 2 to 10 times the optimal size, the simulated result will always be a total loss.

Highlights of Opinions

"I talked with friends about Long-Term Capital Management, Amaranth, and other famous liquidity-driven blowups. The situation with Situational Awareness definitely ranks among them."

"Once the market knows that a fund must be liquidated, the optimal action for others is to sell overlapping holdings and start shorting everything it holds. It's brutal and Darwinian, but very common on Wall Street."

"Those are not the core issues. What really matters is the buying and selling inclinations of buyers and sellers. Smart money enters early, continues to buy as prices rise; later, less savvy investors see the gains and want to jump in. The weakest hands often buy at the top and panic-sell first. Every bubble is similar: euphoria, peaking, and then everyone panics at the same time. Fundamentals matter very little in such moments."

"Ken wants to be the go-to person when everyone is in trouble. Buffett is getting older and doesn't want this kind of work. But Citadel played this role during the Amaranth liquidation."

"Hedge funds wearing venture capital hats to deal in private equity usually don't end well. Over the next 50 years of hedge fund history, few will be able to do both well."

"Leopold didn’t do anything wrong; the level of leverage determined the outcome. With just a slight disturbance, he had to liquidate; there was no other ending, sadly."

"If you are going to hold these stocks, you must ensure you can hold them down to a 2x P/E ratio or even a 1x P/E ratio without blinking. The only ones capable of holding 10 billion dollars without blinking are probably at the Citadel level."

Main Text

1. Introduction: The Most Insane Month in Wall Street History

Shkreli stated at the podcast's onset that the past 24 hours were among the craziest experiences in his personal investing career. He mentioned that he heard rumors about the Situational Awareness Fund's troubles from friends in the industry since mid-last week, gradually becoming clearer by Thursday night and Friday morning. He likened this event to famous liquidity-driven blowups like Long-Term Capital Management (LTCM) and Amaranth, believing it "certainly ranks among them."

What impressed him was that the fund was quite secretive. However, the market is sharp, and some large trading counterparties likely began positioning themselves as early as Monday and Tuesday of that week. He quoted his former employer Cramer who referred to this as "shooting against a fund," meaning that when a fund is forced to liquidate, the optimal strategy for others is to sell overlapping holdings while shorting everything it holds. This is not a moral issue; it is purely game theory.

2. Root Cause: Not War, Not Oil, But Marginal Traders and Leverage

The host tossed out a series of macro narratives to test: U.S.-Iran war? Oil prices? Open-source AI anxiety? Peak capital expenditures of massive cloud vendors? Shkreli denied all of them.

"Those are not the core issues. What really matters is the buying and selling inclinations of buyers and sellers." He described the classic path of bubble psychology: smart money enters first, continues to buy as prices rise; later participants see 400% returns and are driven by fear of missing out to join in; the weakest hands buy at the top and panic-sell first. Shkreli self-deprecatingly said, "People like me start buying near the top. I think memory is great, bottleneck trading is great."

He emphasized that during such times, fundamentals matter almost not at all, because what determines price is the marginal 5% of traders. The issue lies precisely in the fact that these 5% are under 3 to 4 times leverage. According to market rumors, SALP utilized about 4 times leverage: "A 25% drawdown can get you out."

3. The Mathematics of Four Times Leverage: From 45 Billion to 5 Billion

Shkreli used a simplified set of figures to help the audience understand the cruelty of leverage. Assuming the fund had 35 billion dollars in principal, plus about 10 billion dollars in private equity from Anthropic (based on the understanding at the time), the book value of the principal would be about 45 billion dollars. Operating with 4 times leverage means total holding value of about 120 billion dollars.

When the holding value drops by 25%, meaning the total holding value falls from 120 billion to about 90 billion, the book net worth shrinks from 35 billion to about 5 billion, or even lower. Once net worth approaches or drops below zero, the prime brokers (Goldman Sachs, Bank of America, etc.) will intervene. They are not there to save you; they are there to take over assets and sell them as quickly as possible because "their board of directors would rather confirm a 1 billion loss than risk a 5 billion loss."

There are rumors that Leopold urgently contacted about 10 institutions over the weekend trying to sell Anthropic equity to supplement liquidity, with the quotes based on an approximately 1.1 trillion dollar valuation for Anthropic. But ultimately, the disposal rights of public book fell into the hands of the Prime Broker, with Citadel as the buyer taking over the whole deal at a discount.

4. The Hunting Mechanism: When the Market Scented Blood

Shkreli detailed the operational difficulties of liquidating large positions. You cannot handle a 100 billion dollar position by just clicking "sell" on Robinhood.

The normal process is to call Goldman Sachs, who will act as intermediaries to find buyers. However, intermediaries are obliged to "advertise" this order to the market, that is to disclose their market maker identification codes (like GSCO) and the items for sale. Once the news is out, the whole of Wall Street knows "there's a big seller."

Several things may happen at this point: smaller funds might secretly short the security in anticipation of blocking the big seller; institutions genuinely interested in buying may hesitate, "If his supply is really big, I need to act cautiously." The holder list is that long; you call Fidelity, ask about index funds, and they all say no sales, "then it must be him."

More brutally, when the market confirms that someone must sell 100 billion dollars, "there will be trillions of dollars of capital blocking his way, just waiting to see him cry." This is not just Leopold's 100 billion; multiplied by 5 to 10 times represents the total amount of capital in the market doing the same trade. Shkreli believes that although the most intense phase of liquidation may have passed, in the coming weeks, more funds will be revealed to have lost 30% to 40%.

5. Citadel’s Entrance: Ken Griffin Wants to Be "That Guy"

During the asset bidding process, Jane Street, Millennium, and Citadel were introduced into a closed circle. Shkreli heard that Millennium did indeed make an offer, but Citadel's terms were better.

He commented on Ken Griffin's motives: "Ken wants to be the go-to person when everyone is in trouble." Buffett is getting older and doesn't want to handle this kind of mess, but Citadel has played a similar role during past crises such as the Amaranth natural gas blowup and the Enron collapse. This is an extremely expensive brand investment, "that may only come into play once every ten years, but can earn 5 billion to 10 billion for free in one go."

Citadel managed to achieve a slight positive return this month; Shkreli believes this is likely because they were already hedged. More importantly, as a major client of prime brokers, Citadel owns a vast amount of trading data globally, giving them a natural advantage in information and execution speed.

6. Prime Brokers Are Not Your Allies

Shkreli explained the business model of prime brokers: they make money through financing spreads. If you borrow on 4 times leverage, prime brokers might earn 400 to 800 basis points of "free income" from it. So they love leverage.

However, the risk departments within prime brokers are watching a different set of metrics: too high concentration is unacceptable, and having too large of a short position is also a concern (GameStop's lesson). What bothers them most is private market equity. In Shkreli's view, hedge funds engaging in venture capital is a "death kiss." East Coast hedge funds typically cannot compete with West Coast venture capitalists.

Leopold's situation is particularly tricky: Anthropic is private equity, and he is so close to the company that he cannot be any closer (his fiancée is the chief of staff for Anthropic's CEO Dario Amodei). Though demand for Anthropic has surged 100 times over the past six months, when cash is needed, "you can't press the sell button."

There were rumors that someone was tapping Leopold on the shoulder on Monday or Tuesday saying "your margin looks a bit thin, can you supplement a few billion," but things developed too quickly, leaving no time at all.

7. Can Leopold Make a Comeback?

The host asked Leopold if he could rebuild his career. Shkreli believes it is completely possible.

He cited Peter Thiel as an example: Thiel's macro hedge fund Clarium Capital performed poorly in later stages, but he later pivoted to Founders Fund, becoming one of the most successful VCs in history, and also restarted Thiel Macro. Shkreli stated that Leopold could take a few years to restart and learn from this experience; "no one denies he is a genius."

However, this process inevitably comes with humiliation. Just two months ago, it was the largest hedge fund in the world, and two months later, it was forced to liquidate, "this is an extremely painful moment." Additionally, recourse clauses in the hedge fund industry may complicate matters further. Many institutions now require fund managers to return the 2% management fee and 20% performance incentive earned previously during severe drawdowns.

Shkreli also mentioned that Leopold's delayed 13F filing once sparked market speculation, "Everyone thought he had negotiated some confidentiality agreement, but it turns out he just didn't pay attention." This indirectly reflects the immaturity of a young fund in terms of operations and communication.

8. Lessons for Everyone: Kelly Criterion and Position Management

At the end of the podcast, Shkreli shared his position simulator using the Kelly Criterion.

The Kelly Criterion shows that if your win rate advantage is 55%, the optimal position size is 10% of the principal. However, in reality, almost every trader is betting at 2 to 10 times the optimal size. He demonstrated with the simulator: even with a 60/40 edge in win rate, if you overbet, the result will always lead to a total loss.

He recalled that after leaving the Tiger Cub, he had the opportunity to observe a low-profile fund manager who had worked at SAC Capital (now Point72) for many years. This person managed three to four hundred million dollars, almost all of which was his own money, with 80% to 90% of funds lying in cash, only making small trades, and never experiencing a losing quarter in over 20 years, yielding annual returns of 20% to 30%.

"Then the first thing I did after getting capital was to go on 8 times leverage. The dumbest thing in the world."

Shkreli said that ultimately, this is a psychological issue. Hedge funds are the sexiest, most painful, and most 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 Korean stock prices and then wake up again at 6 a.m. to see what has happened in the world, "You basically did nothing, just playing a high-risk crazy game of poker."