Artificial intelligence has become one of the most dominant investment themes in global markets, driving unprecedented spending on chips, data centers, and computing infrastructure. But as billions of dollars flow into the sector through increasingly complex financing structures, investors are starting to question whether leverage is becoming the biggest risk behind the AI boom.
The debate has intensified following the collapse of AI-focused hedge fund Situational Awareness, whose highly leveraged bets unraveled after a sharp selloff in technology stocks. While some market participants view the episode as an isolated case of poor risk management, others see it as a warning sign that borrowing, derivatives, and off-balance-sheet financing are quietly becoming central to the AI investment story.
Nvidia's infrastructure push highlights the scale of AI spending
The discussion comes as Nvidia works with some of Wall Street's largest financial institutions to unlock more than $500 billion of third-party capital for AI infrastructure. The chipmaker has partnered with firms including Apollo, Blackstone, BlackRock, Brookfield, KKR, and Goldman Sachs to finance the next generation of AI data centers and computing platforms.
Nvidia CEO Jensen Huang recently described the company's chips as an "investable infrastructure asset," underscoring how AI hardware is increasingly being treated like long-term infrastructure rather than traditional technology equipment. Financing these projects is becoming increasingly complex, with hyperscalers using joint ventures, leasing structures, and asset-backed financing to fund massive capital expenditure programs—some of which do not immediately appear on company balance sheets.
Goldman Sachs estimates that hyperscalers now have approximately $1.5 trillion in combined lease commitments covering data centers, research facilities, offices, and equipment, up from roughly $200 billion five years ago. About $1 trillion of those commitments are classified as "uncommenced" leases, meaning they have not yet been recognized in financial statements but will eventually translate into contractual payment obligations. Goldman analysts warned that this accounting treatment "can understate leverage and future liquidity needs" because these commitments ultimately become recognized liabilities as projects commence.
AI investment cycle reaches historic proportions
The sheer scale of AI investment has prompted comparisons with some of history's largest infrastructure booms. Lotfi Karoui, multi-asset credit strategist at PIMCO, said the current AI capital expenditure cycle is, after adjusting for inflation, on track to become the largest investment cycle since the railway construction boom of the nineteenth century. In commentary published on Aug. 11, Karoui noted that consensus forecasts now expect hyperscaler capital spending alone to exceed $1 trillion annually from 2027, adding that there are "no clear signs of moderation."
As borrowing requirements expand, technology companies are increasingly issuing debt beyond traditional US dollar markets. Karoui said issuers have tapped euro, sterling, yen, Swiss franc, and Canadian dollar bond markets to diversify funding sources. He also observed that euro-denominated bonds issued by companies such as Amazon and Alphabet have outperformed comparable dollar-denominated debt, potentially indicating growing demand fatigue among investors in US credit markets. According to Karoui, continued AI-related debt issuance in the United States could eventually push credit spreads wider for heavily exposed issuers.
Situational Awareness becomes Wall Street's cautionary tale
While infrastructure financing has attracted attention, leverage inside equity markets has also come under scrutiny following the collapse of Situational Awareness. Founded by former OpenAI researcher Leopold Aschenbrenner, the hedge fund rapidly became one of Wall Street's most closely watched AI investors after generating extraordinary returns during its early months. Aschenbrenner, who previously worked on OpenAI's Superalignment team after graduating from Columbia University at age 19, built the firm's investment strategy around his conviction that artificial intelligence would fundamentally reshape the global economy.
His 2024 essay, Situational Awareness, attracted significant attention across Silicon Valley and helped secure backing from prominent technology investors including former GitHub chief executive Nat Friedman and Stripe founders Patrick and John Collison. The fund reportedly delivered returns exceeding 400% during the first half of the year, with assets eventually swelling to roughly $24 billion. Its portfolio included concentrated positions in companies viewed as major AI beneficiaries, including CoreWeave, Broadcom, Intel, Bloom Energy, and SanDisk.
However, the same concentration that amplified gains also magnified losses. Bloom Energy and SanDisk each fell about 40% between late June and early August, while the Wall Street Journal reported that the fund lost approximately 67% during July. According to Reuters, mounting losses eventually forced Situational Awareness to sell most of its public equity portfolio. Ken Griffin's Citadel purchased the leveraged portion of those holdings, with Goldman Sachs, JPMorgan Chase, Bank of America, and Citigroup helping facilitate the transaction. The fund is expected to retain roughly $10 billion of assets, including private investments such as its stake in Anthropic.
Analysts differ on whether leverage is the real threat
The collapse has divided market observers over whether leverage poses a broader systemic risk. Some argue that the AI financing boom, while large, is supported by strong cash flows and long-term demand, making it fundamentally different from past credit bubbles. Others point to the growing use of off-balance-sheet structures and the sheer size of uncommenced leases as potential sources of stress if the AI investment cycle slows.
As Nvidia's $500 billion financing plan moves forward, investors will be watching closely to see how these leverage dynamics evolve. The outcome could have significant implications for credit markets, tech valuations, and the broader economy. For now, the AI boom continues, but the question of how much leverage is too much remains unanswered.
This article is for informational purposes only and does not constitute financial advice.
