Photo 1: Fortune via Reuters Connect; Photo 2: Gabby Jones/Bloomberg via Getty ImagesIntense volatility led to a meltdown of levered positions held by Leopold Aschenbrenner's hedge fund last month. The market was caught off guard, and fears of wider contagion briefly circulated. Polymarket says its users saw the issues that hit the fund forming long before the news broke. The meltdown of Leopold Aschenbrenner's hedge fund may have come out of left field for many market watchers, but Polymarket says traders on its platform saw it coming. The implosion of the AI wunderkind's Situational Awareness at the end of July shocked the market, with fears of wider contagion percolating before Citadel swooped in to buy the soured stock portfolio and stoke a fresh tech rally in the process. Polymarket says its users had been eyeing trouble ahead for the fund for some time. Writing on its blog this week, the prediction site laid out how traders were placing bets in the days leading up to the announcement from Aschenbrenner. "Prior to the Financial Times announcement on the evening of July 29 that Situational Awareness was seeking capital, Polymarket traders had already anticipated that the fund was in trouble," the post read.Polymarket's analysis centers on movement in its "AI bubble burst by…?" contract which the blog's authors said as a proxy for the stress in the broader AI trade that caused problems for Situational Awareness.PolymarketThe contract resolves as a "Yes" for bettors based on a handful of conditions being met, including a sharp drawdown from highs in shares of Nvidia or the iShares Semiconductor ETF. Polymarket says the contracts odds of a "Yes" resolution spiked to 20% two days before Situational Awareness was in the headlines. "By comparing the movement of this AI stress index to the news flow around Leopold's fund, we see that this Polymarket contract anticipated many of the key developments in the saga."PolymarketPolymarket says the chart above shows a timely divergence between the contract and the chip stock selloff that hammered the sector at the end of July. That burst of withering volatility is what ultimately blew up Aschenbrenner's stock portfolio. Odds for the "AI bubble burst by…?" contract have since dropped back down to 13%, which about the level it was trading at before Situational Awareness ran into trouble. The platform also said that contracts tied to odds Nvidia would be the largest company in the world at the end of August also predicted the trouble that was heading for Aschenbrenner's fund. The odds fell from 78% on July 24 to 36% on July 30, which Polymarket says anticipated the swings that hurt the fund. "Across a handful of Polymarket contracts, you could watch as systemic risks to the AI trade were repriced in real time," it added. "While equities gyrated wildly as traders hunted Leopold's troubled trades, Polymarket moves were more modest, never pricing the AI bust scenario above 30%."Read the original article on Business Insider
Don't miss out on breaking stories and in-depth articles.
