I consider myself a “crisis investor” or, perhaps more accurately, a “niche investor”. My focus is on situations where the relationship between risk and potential reward is heavily skewed in my favour.

I am not trying to predict every market move or own every great company. Instead, I look for opportunities where the downside is relatively limited compared to the upside if the investment thesis plays out.

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Please find below the portfolio update:

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Before that, he had also spent time at FTX, the cryptocurrency exchange that spectacularly collapsed in 2022, wiping out billions of dollars in customer funds and investor value (something prescient about it?).

In April 2024, Aschenbrenner was sacked from OpenAI. Shortly afterward, he published a lengthy essay titled “Situational Awareness”, in which he laid out his expectations for the coming decade of artificial intelligence.

His central argument was that AI progress would continue at an extraordinary pace, leading to systems with superhuman capabilities much sooner than most people expected. He also argued that the race to build these systems would have profound economic, geopolitical, and national security implications.

The essay quickly became one of the most widely discussed pieces of writing in the AI community. Supporters praised it as a clear-eyed assessment of where the technology was heading, while critics argued that some of its timelines and predictions were overly ambitious. Regardless of where one stood, the paper succeeded in putting him in the spotlight.

He later capitalized on that visibility by launching a hedge fund named, you guessed, “Situational Awareness” (SA). The fund reportedly began with approximately $45 million in assets under management. According to recent reports, however, it has grown dramatically, reaching roughly $45 billion by late last month.

Naturally, a large part of that growth reflects fresh capital from new investors, as well as additional commitments from existing ones. But another important driver has been a much older financial tool: leverage.

By borrowing capital to increase the size of its positions, the fund was able to amplify gains in a market that has rewarded concentrated bets on the AI boom. Of course, as I mentioned many times, leverage is a double-edged sword. It can significantly enhance returns during favorable periods, but it also magnifies losses when markets move in the wrong direction, a lesson that financial history has repeatedly illustrated.

But, as the old Wall Street saying goes, in a bull market, even turkeys fly. During periods of abundant liquidity and investor euphoria, exceptional skill and favorable market conditions can be difficult to distinguish.

Almost everyone looks like a genius when asset prices keep rising and capital is readily available. SA was no exception. Riding the wave of enthusiasm surrounding artificial intelligence, the fund grew at a breathtaking pace, attracting ever more capital and taking increasingly larger positions.

The success story, however, appears to have come to an abrupt end on Thursday morning. According to market reports, SA agreed to sell its portfolio to Citadel in a transaction that, allegedly, brought the fund’s brief but spectacular run to a close.

If those reports are accurate, it marks one of the most extraordinary (and shortest-lived) success stories in the recent history of hedge funds. A fund that seemed destined to become one of the industry’s dominant players instead serves as another reminder that rapid ascent and leverage can make for an equally rapid descent.

Of course, the market, knowing the situation, took full advantage of it, as we can see below:

Fund’s largest positions at the end of the 1st Q:

Source: Bloomberg, L2 Capital

So, let’s have a look at the top 3 positions, corresponding to aprox 55% of the fund (the rest looks pretty much the same):

Bloom Energy:

Source: Bloomberg, L2 Capital

Sandisk:

Source: Bloomberg, L2 Capital

Corewave:

Source: Bloomberg, L2 Capital

Yes, the market saw the problems coming and did not make his life any easier. Once investors began to question the sustainability of the strategy, the pressure intensified. Heavy selling followed, creating a negative feedback loop in which falling prices forced more selling.

Now, after the significant liquidation and the reported acquisition of many of the fund’s assets by Citadel, some of the affected companies may eventually recover, although I still think they are overpriced.

This episode is also a powerful reminder of one of Warren Buffett’s long-standing warnings about leverage. As he famously put it: “If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.”

This is not the first time a “genius” has been introduced to leverage (remember LTCM?), and the results were remarkably similar.

Leverage can magnify returns when things go well, but it can also destroy an entire career. The challenge is that, during a bull market, the risks often appear invisible, until they are not.

Be careful out there.

In this environment, it is essential to remain informed, think critically, and evaluate the credibility of the information we receive.

The pictures below illustrate the importance of developing our own knowledge and informed opinions about issues that matter to us, rather than simply accepting or repeating someone else’s point of view.

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One of the world’s most renowned investors has suggested a target valuation that is approximately five to six times higher than the current share price, and the more I study the situation, the more difficult it becomes to ignore the potential upside.

I previously wrote about these companies some time ago, and despite the strong returns achieved so far, I continue to believe that the most significant part of the opportunity may still lie ahead.

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As most readers know, Cosan has interests spanning several sectors of the Brazilian economy, including energy, logistics, agriculture, and infrastructure. It is a complex business with a long history of value creation, but in recent years the company has struggled under the weight of a more leveraged balance sheet, a challenging macroeconomic environment, and weaker investor sentiment.

The result has been a dramatic decline in its share price, which has fallen from a peak of more than R$27 to R$3.21 on the day I published my original article.

Since then, however, the shares have staged a meaningful recovery. Friday’s close of R$3.84 represents an appreciation of roughly 20% in just one month. For a stock that many investors had effectively written off, that is a notable move, even if it only recovers a small fraction of the losses suffered over the past few years.

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Despite PayPal’s strong brand, massive user base, and ability to consistently generate significant cash flow, market sentiment remained overwhelmingly negative. Most Wall Street analysts had uninspiring price targets and viewed the company as a mature business with little room for growth. The image below, taken last night, shows how consensus looked even after the recent news (I believe this will change quickly though).

Source: Bloomberg, L2 Capital

From my perspective, the disconnect between price and intrinsic value was difficult to ignore. While the market was focused on slowing growth and increasing competition, I believed investors were overlooking the company’s earnings power, cash generation, and the strategic value of one of the largest digital payments platforms in the world.

One of the points I raised in that original article was that PayPal could eventually become an acquisition target. The company had become inexpensive enough that it could attract interest not only from private equity firms but also from strategic buyers looking to strengthen their position in digital payments.

Yesterday, that possibility became much more tangible.

According to Reuters, Stripe and Advent have made an offer to acquire PayPal for $60.50 per share. Compared to where the stock traded when I first wrote about it roughly six months ago, that’s a premium of around 50%. While that is a substantial move in a relatively short period of time, I believe the offer itself significantly undervalues the business.

As I mentioned in the Substack chat last night, if I had the capital available, I would gladly buy the entire company at that valuation. That’s how attractive I believe the economics of the business still are.

For that reason, I expect the PayPal board to reject the proposal. More importantly, I think the emergence of a credible bid could serve as a catalyst for additional buyers to enter the process. Strategic assets rarely attract only one interested party, and once a formal process begins, competing bidders often reassess what they are willing to pay.

Another point I discussed back in February was management’s incentive structure, which I believe is particularly relevant today. As I said then:

“Another important consideration is the new CEO’s compensation package, which includes a competitive base salary and strong performance incentives aligned with shareholder value. His base salary is approximately $1.45 million per year, with an annual bonus opportunity of up to 200% of that amount based on company and individual performance, bringing the potential cash compensation to roughly $2.9 million.

More notable, however, are the equity awards, which are heavily performance-based. He will receive $20 million in make-whole RSUs vesting over three years, approximately $33 million in equity grants in 2026, and around $11 million tied to 2027 performance.

The centerpiece is a one-time $25 million Stock Price PSU grant, which vests based purely on PayPal’s stock performance over a 3 to 5 year period: a 60% stock increase triggers a 1× payout, 100% and at least $100/share pays 1.75×, and 150% and at least $125/share pays 2.5×, with a maximum potential value of $62.5 million. This structure aligns the CEO’s incentives directly with long-term shareholder value and stock performance.”

This structure is important because it creates a powerful incentive for management to maximize long-term shareholder value rather than simply accepting the first offer that arrives.

The CEO stands to make a substantial amount of money if PayPal ultimately sells at a meaningfully higher valuation, so I would expect management to negotiate aggressively and push for a better price.

PayPal had already hired Goldman Sachs and Evercore to explore strategic alternatives, and I am sure they are also evaluating the current proposal. That suggests the company is taking the process seriously while remaining open to competing bids.

Even after today’s rally of approximately 17%, I continue to believe PayPal remains undervalued.

If the current proposal at $60.50 ultimately succeeds, investors purchasing shares today would still earn roughly another 10% from current levels. While that would represent a respectable return, I actually hope the process doesn’t end there.

In my opinion, the most interesting outcome would be for this initial offer to bring additional bidders to the table. Once multiple parties recognize the value embedded in the business, the acquisition price could increase materially from the current proposal. In M&A situations, the first bid is often just the starting point rather than the final outcome.

Of course, there are risks. The current offer could be rejected without another bidder emerging, negotiations could break down, or financing conditions could change. Any of those outcomes could cause the stock to retrace some of its recent gains.

Even so, my fundamental view hasn’t changed.

PayPal remains a business that, according to JPMorgan estimates, is expected to generate more than $7 billion in free cash flow next year. For a company with that level of cash generation, a globally recognized brand, hundreds of millions of active accounts, and meaningful optionality around future growth initiatives, I continue to believe the current valuation does not reflect its intrinsic worth.

Whether the company ultimately remains independent or is acquired, I still think the shares deserve to trade materially higher over time.

For that reason, the fund I advise added to its position today.

THIS IS NOT FINANCIAL ADVICE. PLEASE DO YOUR OWN DUE DILIGENCE AND DO NOT BUY OR SELL ANY SECURITIES BASED SOLELY ON THIS INFORMATION.

The market had been pretty negative on the stock over the past few weeks, but today’s announcement was enough to shift sentiment. Shares jumped almost 8% following the release.

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Rather than responding only in the comments, I believe it’s worth laying out my framework in more detail, as it applies not only to this specific case but to investing more broadly.

The question touches on a broader issue: how I think about investment opportunities that involve political or regulatory uncertainty, and why I sometimes make exceptions to my general preference for avoiding such situations.

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The main criticism of ART’s portfolio is that passive investing has led to an excessive concentration in a handful of companies. This should not come as a surprise. Most major equity indices are market-cap weighted, meaning that as companies become larger, they automatically account for a bigger share of the index. The more successful they become, the more money passive funds are required to allocate to them.

Today, for example, the Magnificent Seven (Mag-7) account for approximately 55% of the Nasdaq-100 and around 37% of the S&P 500.

Despite their names, these indices do not actually contain exactly 100 and 500 companies. Today, the Nasdaq-100 represents 101 companies, while the S&P 500 contains 503 listed securities due to multiple share classes. Technicalities aside, the level of concentration is extraordinary.

Think about what this means. In an index of roughly 100 companies, just seven represent more than half of the total value. Even in the much broader S&P 500, seven companies account for more than one-third of the index. For every dollar invested in a passive S&P 500 fund, around 37 cents is allocated to just seven companies, while the remaining 63 cents is spread across the other 493 companies.

This is an unprecedented level of concentration in modern equity markets.

The Mag-7 are undoubtedly exceptional businesses. They are global leaders in their respective industries, possess enormous competitive advantages, and generate substantial cash flows. In many respects, they enjoy the kind of market dominance that Wall Street has historically rewarded.

However, the landscape is changing. These companies are increasingly competing with one another, particularly in artificial intelligence, where they are collectively committing hundreds of billions of dollars to infrastructure, chips, data centres and software. Those investments may ultimately deliver exceptional returns—or they may prove less profitable than investors currently expect.

The investment environment has changed as well. These businesses are no longer simply printing money with little capital investment. Their strategies are evolving, capital requirements are increasing, and future returns may look different from those of the past decade.

Large institutional investors such as ART appear to have recognised this shift and are adjusting their portfolios accordingly.

There are still many attractive opportunities across the market beyond the largest technology companies. As always, disciplined investing remain important, particularly when market leadership has become so concentrated.

They may sell underperforming stocks and increase positions in stronger-performing names so their portfolios appear more attractive to clients and investors. While these trades don’t change the portfolio’s past performance, they can influence how holdings look on paper at the end of the reporting period.

This activity can also contribute to higher trading volumes and increased volatility in certain stocks during the final trading days of the quarter.

Most value investors dislike this time of the quarter because many of the stocks they own, often temporarily out of favor despite having strong fundamentals, come under even more selling pressure.

Meanwhile, the market’s recent winners continue to attract buying interest, making momentum stocks look even more impressive as portfolio managers position their holdings for quarter-end reporting.

Personally, I welcome days like this. Market weakness driven by other factors rather than business fundamentals often creates opportunities. When high-quality companies with solid long-term prospects become even more attractively priced, it gives patient investors the chance to buy businesses they already like at a greater discount.

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At the beginning of this month, I wrote an article about a company that started as a bank but gradually expanded into a much broader set of businesses, all while achieving a level of dominance that is rarely seen.

What began as a relatively small financial institution evolved into a multibillion-dollar company that ultimately listed on the Nasdaq.

This is not the path most successful companies have traditionally taken. Historically, we have seen merchants, retailers, and technology platforms expand into financial services. Companies build large customer bases and then add banking products as a way to deepen engagement and increase monetization.

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