A former hedge fund manager whose firm generated billions during the global financial crisis is poised to capitalize on market volatility once more, as he perceives threats to market stability at levels reminiscent of 2008.
Steve Diggle’s family office, Vulpes Investment Management, is aiming to raise up to $250 million from investors as early as the first quarter, according to statements made by the Oxford, UK-based investor in a telephone interview.
Diggle, whose firm earned $3 billion between 2007 and 2008, is seeking funds for a hedge fund and managed accounts intended to yield substantial returns during market downturns and to profit from strategic bets on both rising and falling stocks during more stable periods.
The initiative to establish the new fund emerged after the firm created a model utilizing artificial intelligence to analyze extensive amounts of public data. This model has proven effective in identifying Asia-Pacific companies with a high likelihood of failure due to risky practices such as excessive leverage, asset-liability mismatches, or even outright fraud, according to Diggle. The equity portfolio will also include individual stocks or indices as bullish investments.
Diggle is making a significant foray into volatility trading following the closure of his previous firm, Artradis Fund Management Pte, in March 2011. The Singapore-based hedge fund had seen its assets grow to nearly $5 billion in 2008, driven by profits from market downturns and banking crises, only to later succumb to a market shift caused by unprecedented central bank interventions.
“The number of fault lines out there today are greater, and the chances of something going wrong are significantly greater, but risk prices have come down,” Diggle remarked, drawing parallels to the conditions experienced during over a decade of accommodative monetary policies. “So we are kind of in an analogous situation to where we were in 2005 to 2007.”
He referenced increasing geopolitical tensions and the challenges faced by China’s shadow banking system. According to Vulpes in a promotional document for the new fund, retail investors, the rising influence of passive investment funds, and high-frequency traders are likely to intensify market downturns, similar to the events of March 2020 and August 2024.
Diggle, a former leader of various teams at Lehman Brothers Holdings Inc., co-founded Artradis with Richard Magides in 2001. In the period leading up to the financial crisis, his firm engaged in over-the-counter options and variance swaps purchased from banks, betting on increases in market volatility.
At one point, Artradis accumulated credit default swaps with a notional value exceeding $8 billion on the very banks that provided those tail risk derivatives. This strategy served both as a hedge against the banks’ potential failure to meet their obligations during market downturns and as a bet on the lenders’ inadequate risk management.
The credit default swaps on Lehman Brothers settled at a staggering 367 times the price Artradis initially paid after the bank declared bankruptcy in September 2008, while the equivalent instrument for UBS Group AG yielded approximately a 20-fold return, according to Diggle.
Hedge funds that focus solely on profiting from rising volatility typically incur losses during more stable market periods. Since the closure of Artradis, Diggle’s family office has diversified its investments into avocado orchards in New Zealand, real estate in Germany, a biotechnology firm in the UK, and stocks poised to benefit from European rearmament in response to the Russian invasion of Ukraine.
Although Vulpes has occasionally explored volatility trades over the years, it had not previously pursued them seriously, partly due to a lack of trading opportunities that could mitigate potential losses, as noted by Diggle. The capital structure arbitrage trades that Artradis employed to offset losses from tail risk bets in its early years have become less lucrative.
At the age of 60, Diggle has decided against returning to daily trading activities, choosing instead to focus on advising regarding the management of risks associated with market volatility. Robert Evans, based in Singapore and with experience at firms such as Citigroup Inc., will serve as the primary portfolio manager for the fund.
“It’s a fool’s game to try and say the market is definitely going to crash in 2025, because it’s human behavior,” Diggle remarked. Nevertheless, he emphasized that “Everyone needs to start thinking about their hedges again.”
