Trader Who Made Billions in 2008 Returns to Betting on Market Swings

(Bloomberg) — A former hedge fund manager whose firm made billions during the global financial crisis is ready to pounce on renewed volatility, as he sees a threat to market stability at levels not seen since 2008.

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Steve Diggle’s family office Vulpes Investment Management is seeking up to $250 million from investors in the first quarter, the Oxford, UK-based investor said in a telephone interview.

Diggle, whose firm earned $3 billion between 2007 and 2008, has been pooling money for a hedge fund and managed accounts to generate huge returns in market crashes and profit from day bets on rising and falling stocks in quieter periods. can be obtained

The idea to launch the new fund came after the firm developed a model to use artificial intelligence to read large amounts of public information. Diggle said it helped spot Asia-Pacific companies with a high likelihood of blowing up, due to risky behavior such as high leverage, asset-liability mismatches or even outright fraud. An equity portfolio will also have individual stocks or indices as bullish wagers.

Diggle is making its biggest push into volatility trading since the March 2011 closure of its predecessor firm Artradis Fund Management Pte. The then-Singapore-based hedge fund firm grew assets to nearly $5 billion in 2008, boosted by market speculation and profits from bank troubles, only to later suffer a turn in markets brought on by unprecedented central bank intervention. happened

“The number of fault lines is higher today, and the probability of something going wrong is much higher, but the prices of risk have come down,” Diggle said, comparing conditions to conditions under more than a decade of easy monetary policies. “So we’re in a similar position to where we were in 2005 to 2007.”

Among the potential flashpoints are inflated valuations of US stocks, the glut of the nation’s prime office market, high federal debt and tight credit spreads. A new “bull market generation” of traders entering the industry since 2008 has driven a small group of U.S. technology stocks and crypto to dazzling heights, Diggle said. Meanwhile, it’s cheaper to buy devices to protect against ruts, he added.

Elsewhere, he cited rising geopolitical tensions and China’s shadow banking problems. Retail punters, the growing strength of passive investment funds and high-frequency traders will likely increase the routes further, as they did in March 2020 and August 2024, Vulpes said in a marketing document for the new fund.

Lehman Brothers Holdings Inc. Diggle co-founded Artradis in 2001 with Richard Magides, a former head of various teams at In the lead up to the financial crisis, his firm used over-the-counter options and variance swaps that it bought from banks as bets. Increase in securities swings

Artradis at one point also collected credit default swaps with a notional value of more than $8 billion on banks that sold it tail risk derivatives. It was used as a hedge against banks’ inability to honor their obligations if the markets were to decline and in part as a wage on lenders’ poor risk management.

A Lehman Brothers CDS settled at 367-times the price Artradis paid after the bank filed for bankruptcy in September 2008, Diggle said, while a similar instrument on UBS Group AG returned about 20-times. .

Hedge funds that bet squarely on rising volatility tend to lose money during quiet days in the markets. Since the closure of Artradis, Diggle’s family office has invested in avocado plantations in New Zealand, real estate in Germany, a biotechnology company in the UK and stocks that could benefit from European rearmament following the Russian invasion of Ukraine.

While Vulpes has occasionally toyed with volatility trading over the years, it hasn’t tried it seriously before, partly because of the absence of trading opportunities that could help offset such losses, Diggle said. . The capital structure arbitrage trade Artradis used in its early years to subsidize tail risk betting losses has become less profitable.

At 60, Diggle will not return to day trading, opting to advise on overall risk management of the volatility segment. Singapore-based Robert Evans, who heads Citigroup Inc. The principal portfolio managers of the fund will be working in companies including

“It’s a fool’s game to say the market is definitely going to crash in 2025, because that’s human behavior,” Diggle said. Still, “everyone should start rethinking their hedges.”