The enormous wave of spending on artificial intelligence infrastructure is increasingly being powered by debt, leases and derivatives, and the collapse of a leveraged AI-focused hedge fund has sharpened questions about how much risk has piled up beneath the surface.
Nvidia has joined forces with some of Wall Street’s biggest asset managers to mobilize more than $500 billion in third-party capital for AI infrastructure. As that buildout accelerates, the complex financing structures behind it are coming under closer watch.
Hyperscalers and their financial backers are tapping bond markets, forming joint ventures and signing leases to fund what is shaping up to be an unprecedented construction boom. At the same time, hedge funds and other investors are amplifying their exposure to the AI trade through prime brokerage borrowing and derivatives.
The unraveling of Situational Awareness, a hedge fund that took heavy leveraged bets on AI-related equities, has amplified concerns over how much is being borrowed, where that debt sits, how visible it is, and how quickly it could unwind. Market participants are now debating whether the expected returns from AI infrastructure can justify the scale of spending.
Nvidia’s plan to develop AI infrastructure platforms with Apollo, Blackstone, BlackRock, Brookfield, KKR and Goldman Sachs could rely on private asset structures and asset-based financing. Nvidia CEO Jensen Huang told CNBC on Monday that the company’s chips have become an “investable infrastructure asset.”
Some of the largest technology companies are using joint ventures and leasing vehicles to borrow money for AI data centers without immediately adding the debt to their balance sheets. Goldman Sachs analysts estimated that hyperscalers now have combined lease commitments of about $1.5 trillion for data centers, research facilities, offices and equipment, up from roughly $200 billion five years ago. That total includes around $1 trillion of “uncommenced” lease commitments, which are not yet reflected in financial statements but will require future payments.
Goldman analysts wrote in an Aug. 6 note that this situation “can understate leverage and future liquidity needs as these obligations are eventually recognized and contractual payments come due.”
The surge in debt issuance, including less visible forms of leverage, is focusing attention on whether the eventual returns from AI infrastructure will justify the enormous sums being committed. Lotfi Karoui, a multi-asset credit strategist at PIMCO, said the AI capital expenditure cycle is, adjusted for inflation, on track to be the largest investment cycle since railway construction in the 19th century.
In PIMCO commentary dated Aug. 11, Karoui said the ultimate scale of the buildout remains “deeply uncertain.” He pointed to consensus forecasts that hyperscaler capital spending alone will surpass $1 trillion per year from 2027 onward, “with no clear signs of moderation.”
Karoui also noted that hyperscalers are borrowing so heavily that they are diversifying beyond dollar-denominated debt, with issuers tapping euro, sterling, yen, Swiss franc and Canadian dollar markets. He said the relative outperformance of euro-denominated bond spreads issued by Amazon and Alphabet, compared with their U.S. dollar counterparts, potentially suggests “demand fatigue” in the dollar market. He warned that the wave of AI-related issuance in the U.S. could push spreads higher because a handful of larger AI-exposed issuers have underperformed.
The collapse of Situational Awareness showed how vulnerable crowded, leveraged AI trades can be to the sharp sell-offs and rallies that have hit the sector. The fund was unable to meet a series of margin calls after its heavily concentrated portfolio, which included stocks such as SK Hynix and CoreWeave, suffered during a recent tech sell-off. Its assets fell from $45 billion to about $10 billion.
Ken Griffin’s multi-strategy hedge fund Citadel later bought Situational Awareness’ publicly listed positions at a discount. SK Hynix and CoreWeave have since rallied.
JPMorgan CEO Jamie Dimon recently told CNBC’s Leslie Picker that margin debt is “pretty high,” and that it increases the risk of amplified volatility.
Sahil Mahtani, director of the investment institute at Ninety One, told CNBC that elevated earnings expectations were a more immediate concern than leverage. He said expectations “of high and rising earnings in the years ahead” were “the main risk” the AI trade posed to markets. “That is primarily an expectations problem rather than a leverage problem,” Mahtani said via email.
Mahtani noted that equity concentration is “historically high” in tech-heavy markets, particularly in the U.S. While that may not be financial leverage, he said the concentration can act like leverage by amplifying market moves when heavily weighted stocks fall.
“The big equity indices are extremely concentrated, and no one thinks anything could possibly derail them,” Mahtani added. He warned that a shift from companies buying back shares to issuing more stock could remove a source of support for equity prices just as AI-related valuations are already under pressure.
Regarding the Situational Awareness collapse, Mahtani said it reflected poor risk management, but its broader impact had been largely contained. “Its bull run coincided with the unwind of leveraged ETF structures, primarily in East Asia. Many of these structures, particularly the single-stock structures, were only launched in H1 of this year. In that sense, it is a relatively contained case study.”
A spokesperson for the Alternative Investment Management Association, the global trade body for the hedge fund industry, said leverage is a “core tool” used by hedge funds to boost returns and provide market liquidity. “The key question is not whether hedge funds use leverage, but whether its use poses a material threat to financial stability. The available evidence does not support treating hedge fund leverage as an inherent systemic risk,” the spokesperson told CNBC.
The spokesperson noted that two previous leverage-related disruptions, the 2021 collapse of Archegos Capital Management and the 2022 U.K. Liability-Driven Investment gilt market stress, involved different structures and investors. “It is important not to lump very different market events together. Archegos was a family office, not a hedge fund, while the 2022 gilt episode centred on leveraged LDI strategies used by pension funds. We have seen no reason to expect the Situational Awareness episode, in itself, to trigger a fresh review of the rules governing hedge fund leverage.”
The full scale of borrowing tied to AI infrastructure remains difficult to measure, and the debate over whether revenues will justify the spending is unresolved. The Situational Awareness episode has underscored the risks hidden in complex, leveraged structures, even as industry officials argue that hedge fund leverage does not pose a systemic threat. For now, investors and regulators alike are left weighing the promise of AI against the growing financial engineering that is funding it.
