Stephen Diggle, the Singapore-based hedge fund manager who made $2.7 billion for investors as markets see-sawed in 2007 and 2008, started a new hedge fund that places wagers on price swings, two months after liquidating Artradis Fund Management Pte’s volatility funds.
Diggle’s new alternative investments firm, Vulpes Investment Management, started its long Asian volatility and arbitrage fund, LAVA, on May 1, with $30.5 million, of which $30 million was the founding partners’ money, he said in an interview yesterday.
Singapore-based Vulpes, Latin for fox, is “very positive” after volatility prices hit four-year lows as global stocks advanced to the highest since July 2008, Diggle said. The VIX Index, a measure of market volatility known as Wall Street’s “fear gauge,” is down by half from this year’s peak to the lowest since June 2007.
“It’s a better time to do it now than it has been for some time,” Diggle, 46, said. “We are much nearer the lows than we are at the highs.”
The VIX, based on Standard & Poor’s 500 option prices, reached a low of 9.3 in December 1993, and a record 80.86 in November 2008 after the collapse of Lehman Brothers Holdings Inc. sent stocks plunging worldwide. It was at 14.62 last week, versus 29.40 on March 16. Lower readings indicate more confidence about the market’s prospects.
Uncertainty surrounding a shift in monetary policy could be a “potential catalyst for volatility,” Diggle said. The Federal Reserve is winding down its $600 billion bond-purchase program known as quantitative easing.
“We’re in a period now where governments around the world are trying to normalize liquidity conditions having spent two years flooding the world with them,” Diggle said. “It’s been an experiment that in some ways has been successful in terms of reflating asset prices, but it’s an experiment still and we don’t know what happens when you try and withdraw this sort of liquidity.”
Artradis, founded by Diggle and Richard Magides in 2001, closed down in March after giving investors in the firm’s AB2 Fund and Barracuda Fund their money the previous month. Once Singapore’s biggest hedge-fund manager, its funds lost $700 million for investors as volatility declined in 2009 and 2010, Diggle said. Artradis managed as much as $4.9 billion in 2008.
Similar to the Artradis Barracuda Fund, LAVA seeks to produce returns that aren’t correlated with the market by trading instruments that thrive on volatility, such as options, warrants, and convertible bonds. The funds use strategies such as arbitraging, or profiting from disparities in the price of similar securities that are simultaneously traded on more than one market, and tend to work well when markets go down.
“This negative correlation is a very valuable proposition, particularly in Asia where there aren’t that many ways of making money when markets are weak,” said Diggle, who was previously head of the Asian equity derivatives trading department of Lehman Brothers.
Vulpes has come up with a “definitive risk budget” to limit losses when volatility declines, Diggle said.
“In 2009 and 2010, our risk budget was too high; in an adverse environment, we just bled too much money,” Diggle said. “What we’re trying to do is tweak the process to try and capture the good part of what we’re able to achieve but limit the downside.”
Vulpes appointed former Rabobank executive Bert Verdicchio as its chief risk officer, “who has the authority to override the fund managers, including myself,” Diggle said.
The firm, set up on April 1, manages about $175 million, including the Russian Opportunities Fund and Testudo Fund that it took over from Artradis, Diggle said.
Vulpes started with $200 million in seed capital from Diggle and the other founding partners, and is opening its funds to outside investors, he said. A family office and an endowment fund have invested in LAVA, he said.
Testudo, a global diversified fund and the Latin word for tortoise, was set up with Artradis’s partners’ money, Diggle said. Testudo, which has invested in debt, commodities and alternative funds, has returned about 20 percent since it started in March 2008, he said.
The Russian Opportunities Fund has gained 75 percent since it started in January 2007, outpacing the 5 percent advance in the benchmark Russian stock index, Diggle said.
Diggle plans to move his funds focused on agricultural land ownership and biotechnology this year to Vulpes from Singapore-based GFIA Pte, which has been managing money for him, he said. Vulpes will then open the funds to outside investors, he said.