08/03/2026
8-3-26 Leverage, Swaps & Forced Selling: Lessons From The Momentum Crash
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The recent momentum crash wasn't just about AI and semiconductor stocks falling—it was a textbook lesson in how leverage can amplify both gains and losses.
Much of the dramatic selloff was triggered by the collapse of the highly leveraged Situational Awareness Fund. The fund, run by a 24-year-old, reportedly grew from roughly $250 million to nearly $40 billion by using equity swaps to gain approximately 4x leveraged exposure to momentum stocks.
As long as those stocks kept rising, returns were spectacular. But once momentum reversed, leverage quickly became the fund's biggest weakness.
The most important lesson is that leverage changes who controls your investments. Whether you're using margin, swaps, or leveraged ETFs, there comes a point when your lender or counterparty—not you—decides it's time to sell. When losses become too large, positions are forcibly liquidated to protect the lender's capital, regardless of valuations or long-term fundamentals.
That's exactly what happened. I noticed unusually large declines in several momentum stocks before the news broke and suspected a major liquidation was underway because the price action simply didn't match the fundamentals. Later, reports confirmed that the hedge fund had indeed been forced to unwind its positions.
Once the liquidation was complete, the selling pressure disappeared. Buyers quickly stepped in, helping many of the same AI and semiconductor stocks stage a powerful rebound over the following two trading sessions. That rebound, however, doesn't necessarily mean the correction is over. It simply shows how markets often recover once forced sellers are out of the way.
This lesson extends well beyond hedge funds. Retail investors embraced leveraged ETFs earlier this summer, increasing exposure to the same momentum trade. As markets rolled over, many of those positions were also unwound, adding fuel to the decline.
So, the takeaway is simple: leverage is a powerful tool, but it comes with a hidden cost. It can magnify returns during bull markets, but it also removes your ability to decide when to exit during downturns.
Understanding how leverage, swaps, and forced liquidations work can help investors recognize that not every sharp selloff is driven by deteriorating fundamentals. Sometimes, it's simply the mechanics of leverage playing out—and those who avoid excessive leverage are often in the best position to take advantage of the opportunities that follow.
📺Full episode: https://www.youtube.com/watch?v=XLZMmL1p-H0
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