Investors embrace leverage during stable periods to magnify gains, forgetting its downside. However, leverage also magnifies losses. Marks'

Leopold Aschenbrenner's fund, despite a strong AI thesis, was margin called due to massive leverage. This shows how short-term market corrections, amplified by leverage, can destroy fundamentally sound, long-term positions—a classic lesson Warren Buffett has warned about for decades.

The fund's failure wasn't because its AI thesis was wrong, but because its strategy embraced extreme volatility (150%). The mathematical "variance drag" and risk of ruin were so high that failure was roughly a 50/50 probability from the start, regardless of the underlying market thesis.

To maintain target leverage, these ETFs must buy when markets rise and sell when they fall. This daily rebalancing creates a "short gamma" profile, a non-discretionary flow that automatically amplifies market moves and increases overall volatility, a phenomenon that grows with the funds' assets under management.

Conventional definitions of risk, like volatility, are flawed. True risk is an event you did not anticipate that forces you to abandon your strategy at a bad time. Foreseeable events, like a 50% market crash, are not risks but rather expected parts of the market cycle that a robust strategy should be built to withstand.

The most under-discussed lesson from the LTCM collapse was not firm-level leverage, but the personal failure of its partners to apply a robust risk framework (like expected utility) when deciding how much of their own wealth to invest in their fund.

The spectacular collapse of the $30B "Situational Awareness" hedge fund was a classic financial failure, not a verdict on AI's market viability. The fund used extreme 4x leverage, making it vulnerable to a market drawdown in semiconductor stocks. The core issue was risk management, not the fundamental value of its AI-focused investments.

The Situational Awareness fund collapse shows a correct long-term thesis (AI infrastructure build-out) can fail. When a fund is highly leveraged and concentrated, short-term macroeconomic jitters around interest rates or geopolitical events can force liquidation before the thesis can play out.

Gambler Edward Gilbert used leverage to fund his stock market plays. When the market turned, margin calls forced him to sell at the worst possible time, turning a manageable stock drop into a catastrophic loss. Leverage removes the option to wait out volatility, destroying sound investment strategies.