Martin Shkreli dissects the SALP hedge fund blowup: leverage, liquidity, and the AI trade unraveling
Martin Shkreli places the SALP fund collapse alongside canonical liquidity-driven disasters — LTCM, Amaranth — arguing it belongs in that canon because the mechanics are identical: forced liquidation at scale into a market full of predators who already knew someone had to sell. He claims players were positioning as early as Monday–Tuesday that week, shorting SALP's holdings to accelerate the margin spiral. Once the fund's equity fell toward zero, prime brokers had no choice but to act, since below-zero equity becomes the broker's loss, not the fund's.
The fund's structure made catastrophe almost inevitable. Shkreli describes SALP running 4x leverage on roughly $45 billion in assets, implying ~$120 billion gross market value, with an estimated $10 billion concentrated in Anthropic — a private, illiquid position. A 25% drawdown at that leverage ratio is extinction-level. When the margin call came, the manager spent the weekend contacting ~10 parties to offload the Anthropic stake (reportedly offered at a $1.1 trillion implied valuation); roughly half sold, with the buyer allegedly booking an instant $3–4 billion markup. Citadel ultimately outbid Millennium for the remaining portfolio, consistent with Citadel's prior playbook in the Amaranth natural gas blowup.
Shkreli raises broader contagion concerns: he estimates the same AI-concentrated trade — semiconductors, hyperscalers, AI infrastructure — was on at 5–10x the scale of SALP's gross exposure across the hedge fund universe. July performance letters are coming, and he expects several more funds to be revealed as down 30–40%. He is skeptical the sector reclaims all-time highs quickly, while noting that broad Wall Street skepticism itself creates a contrarian bull case. He also flags that hyperscalers FOMOed into AI capex just as hard as the funds did, and that markets have been inconsistently punishing and rewarding that spending.
The episode closes on a sharp psychological note. Shkreli invokes the Kelly Criterion — optimal bet size equals your edge minus the reciprocal of your edge — and acknowledges that virtually every trader, including himself, runs 2–10x the mathematically correct position size. He describes a trader he admired who kept 80–90% in cash, never had a down quarter over 20+ years, and compounded at 20–30% annually through tiny, disciplined bets — then admits that the moment he got outside capital, he immediately went 8x leveraged. The lesson he names, and embodies, is that understanding correct risk management and actually practicing it are entirely different psychological problems.
Martin Shkreli breaks down the collapse of SALP, a 4x-leveraged AI-focused hedge fund run by 'Leopold,' comparing it to historic blowups like LTCM and Amaranth. He details how predatory short sellers accelerated the liquidation, how Citadel ultimately won the bid for the portfolio, and warns that other AI-concentrated funds are likely nursing similar wounds. The episode ends with a candid confession about the universal psychology of overleveraging.
the most unexpected thing is would be if we saw brand new all-time highs for the entire thing. I think almost everyone on Wall Street is skeptical this will happen, which means it has a chance of bullish.
If you start a newsletter business that makes a hundred million a year, even 50 million a year of revenue, you've done better than almost every hedge fund on the planet
I'm almost always overbetting. And I think every fund is sort of the same. And certainly every retailer is the same
Psychology is the key differentiator between disciplined low-leverage trading and reckless high-leverage behavior, even when the practitioner understands the correct approach intellectually
Citadel learned about this at the 11th hour as every as you're supposed to
this is up there with long-term capital management, Amaranth, other famous liquidity driven blowups
some players were already positioning say early in the week Monday Tuesday looking to do what my old boss Kramer used to call shooting against a fund
know a wide number of funds that were shorting all these stocks hoping to cause a panic and a crash
SALP is uh was a 4x levered fund, which is that's a lot of leverage. You know, a 25% draw down takes you out of business.
Jane Street, Millennium, and Citadel were sort of brought in in a closed closed circle sort of late Friday to to bid on the remains of of the the firm
we got offered uh, a look at $100 million of entropic stock
Millennium did put in a bid. Uh Citadel's bid was better.
Citadel did this in the Amar deal. You know, when Ameth blew up uh natural gas futures, I think Citadel took that portfolio
you're at 45 billion, you know, sort of try to trace this back and you're you're uh, you know, 10 billion of that is in anthropic from what we understood
running 4x lever means you have 120 billion gross market value
over the weekend he contacted about 10 parties to place Anthropic in an effort to shore up liquidity, selling the Anthropic stake for for allegedly that the offer was at 1.1 trillion uh equivalent market cap
half of it was sold. It's still a little unclear who bought that
the buyer of that book basically got a from what we were told a three to four billion dollar insta markup
one of these three parties reached out to me last night and they said that in essence, at some substance, yes, Leopold flew a little too close to the sun and your numbers are um are a little off
he's only down 30%. 30% you can kind of live with. Uh but also if anthropic hasn't changed its mark, that means you were down 60 in the public book
Leopold had had been at FTX right up until the the the the fall
the fellow is getting getting married this weekend as well
one of the biggest fund of funds in New York for example, who passed on Leopold, basically laughed at him and said, you know, there's no way I could invest in this
we're going to see July numbers very soon here from from quite a lot of hedge funds that I think were in the same trade
this is not just Leopold's 100 billion gross. It's like that times maybe five or 10
the dot bubble took three or four years to like patiently go up and patiently go down
they rewarded Meta Microsoft for being prudent. They they've punished Meta and Google for not being prudent.
this is probably at least since FTX and certainly crazier than the the the sort of Tiger Soft Bank venture boom of 21
Jane was an LP for example in fund and reportedly was not interested in bidding
there's a guy that has to sell a hundred billion, you'll have a trillion dollars in front of him just like, you know, let's let's see this guy cry uncle
he had he sort of had to blow up, you know, there was no other ending sadly
the hyperscalers and the big companies, they fomoed, too. They fomoed just as hard as Leopold did, right? If not harder.
quants could actually use different all kinds of insane you know ideas around what they can do to sort of sniff out that this is happening
Goldman Sachs decided to sell the entire portfolio in one shot, and the discount on those positions could have been as big as 20 to 50%
Kosha in Japan, one of Leopold's holdings, is trading at three times earnings
I do think there are some large tech funds that have had the same trade on. I do think liquidation is over thankfully, but I do think that there are some funds that are about to be found out to be down 30% or down 40% or something
Citadel's performance for this month is surprisingly up
It's up very small
Some people think the equity in Leopold's prime brokerage accounts went negative
Somebody on Monday or Tuesday tapped them on the shoulder and said, 'Your margin's looking a little thin. You know, can you add, you know, a couple billion here or more?' And things happened so quickly that there was just no time
The fund didn't have, to my knowledge, daily performance. From what I'm told, situational awareness as a young hedge fund was not so great with communication, especially with monthly and quarterly letters
The 13F was late and everyone was questioning did he work out some kind of deal to keep it confidential, but it sounded like he just didn't get around to it
Peter Teal had a hedge fund that had a rough last few years but was able to continue his venture investing efforts, creating one of the biggest funds of all time, and also getting back into macro trading with Teal Macro, which supposedly has done well
Just two months separated from the biggest hedge fund on planet earth and most successful to being forced to liquidate is quite a rapid reversal
Anthropic over the last six months has had 100x the demand relative to the allocation
Every single trader out there makes makes one seems to make the same mistake over and over again, which is their position size is probably two to 10x more than it should be
even with a 6040 edge on every trade you make, you'll go bust if you overbet
he was managing I don't know three or 4 hundred million of his own
80 90% of the capital was just cash and he would just make these tiny trades
his record was he never had a down quarter in 20 20 something years of trading
he had like 20 30% returns
the other other AI funds are are hurting. Maybe not as as much as in trouble, but but certainly hurting as well
there are people out there that say, Look, AGI is here slashcoming. When it comes, the entirety of finance is not relevant anymore.
there's still I think some more discerning questions about is are is this capex investment worth it
There's always this conspiracy that as I'm selling on the screens, there's some guy who's can see my screen and he's like, This guy's got a BW market order to sell 10 million shares.
A trader who learns there is a huge seller might turn around and short 50,000 shares to get in front of that seller, which he is not supposed to do
Getting into privates is usually a really bad sign for almost every fund because there is a whole group of people on the west coast who are much better at that than the guys in the east coast
Shkreli self-identifies that upon receiving external capital he immediately used 8x leverage, contradicting the conservative strategy he had observed and admired
if you know somebody has to liquidate the best thing for you to do unfortunately sadly Darwinian is to go sell all the positions you have in common and go start shorting everything they have
the only thing that matters is is the propensity of the buyer and seller to buy or sell
the 80 or 90% of the assets shareholders don't change hands. It's that 5% of the margin that's deciding the price
sometimes when you want to sell four billion dollars of something you don't come out and say you want to sell four billion. You come out and you say I want you want to sell $100 million of it.
your equity drops from 35 billion to 5 billion. Yeah. And no no prime broker is going to let you keep 90 billion of gross market value because once you dip your equity below zero. It's their loss, not yours.
every generation has it, you know, the guy that believes in that cycle and it goes balls to the walls on on that cycle
what's increasingly happened is it is is a is a carry provision where you have to return the two and 20 you earned if you have a severe draw down
when hedge funds put on their VC cap and try to try try to do uh what those guys do it it often doesn't end well. And um that that goes back like you know 50 years basically of hedge fund history.
once there's blood in the water, like these positions would go to zero. Like we'll send Micron to $5, you know, just to eliminate this guy at three
if you sell into the into the market, you can try that and those that's called selling into the screens. The screens are the numbers on your screen. Anybody can buy and sell Robin Hood, whatever.
If you own 10 days of volume in an illiquid stock and try to sell on the open market, you'd have to be the entire volume for 10 days before you'd be out, and you'd probably take the stock down 50% or more
Goldman's four-digit market maker ID is GSCO, and when working a large sell order they advertise their presence as seller while being coy about the exact size
The buyer of these stocks has to have the liquidity to hold them for 5 years and do nothing, because short sellers will try to force them to sell by driving the price down
Citadel has a diverse platform including a guy trading weather, a guy trading rates, about a thousand guys trading stocks, and a computer fund called Citadel Securities that is a market maker trading a good chunk of the volume of every instrument in the world
Prime brokers make their business by making a spread on financing. If a fund borrows 4x and the spread is 1%, the prime broker gets 400 basis points of free money; their borrowing costs may be low enough that they net 600 or 800 basis points
The Kelly criterion proves the optimal bet size is your edge subtracted by the reciprocal of it. If you have 55% edge your optimal bet size is 10%. Most people trade as if they had a 4x or 5x Kelly edge, and if you run the simulator you will go to zero each time
kept 80-90% of capital in cash and made only small position trades, resulting in no down quarters over 20+ years with 20-30% annual returns
“it's waking up at 3:00 a.m. checking Korean stock prices and, you know, waking up back up at 6, you know, wondering what's what's happening in the world”
“the second I get the chance to get some capital, I'm 8x leverage, you know, and it's just like, you know, it's the dumbest thing in the world”
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