Diggle’s Hedge Fund Bets on Volatile Debt as ‘Fault Lines’ Move

Vulpes Investment Management's Stephen Diggle
Vulpes Investment Management's Stephen Diggle. Source: Artradis Fund Management Pte via Bloomberg

Stephen Diggle, the Singapore-based hedge fund manager who made $2.7 billion for investors as markets see-sawed in 2007 and 2008, is betting on price swings in government debt, currency and commodity markets amid concern that the debt crises in Europe and the U.S. may worsen.

There has been an “unprecedented level of transfer of indebtedness from banks to governments” after the global financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., said Diggle, who started Vulpes Investment Management after liquidating Artradis Fund Management Pte’s volatility funds this year.

“The fault lines have moved away from the private sector to the public sector,” Diggle, 47, said. “These sorts of distortions are coming about principally because of government activity rather than excessive fear or greed amongst investors, which is what normally causes volatility.”

European leaders are trying to keep the bailouts of Greece, Ireland and Portugal from spreading to Spain and Italy, and ratings firms have threatened to cut the U.S.’s AAA credit rating. In contrast, non-financial companies’ balance sheets are strong and stock valuations are currently “not extreme,” Diggle said.

“I’m not sure if the next crisis will be centered on the stock markets,” said Diggle. “It’s likely to be centered on government debt markets, currency markets and probably commodity markets.”

Fear Gauge

The VIX, a measure of market volatility known as Wall Street’s “fear gauge,” last week posted its biggest weekly surge since May 2010, as lawmakers clashed over spending cuts and taxes when negotiating an increase of the $14.3 trillion debt ceiling before the Aug. 2 deadline. The VIX, which rose to 25.25 on July 29, reached a record 80.86 on November 2008 after Lehman’s collapse sent stocks plunging worldwide.

Diggle’s new alternative investments firm, Vulpes, 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. The fund has gained 1.5 percent since May 1, Diggle said.

Vulpes, 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.

Fund Closure

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. Once Singapore’s biggest hedge-fund manager, its funds lost $700 million for investors as volatility declined in 2009 and 2010, Diggle said in May. 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.

While the LAVA fund is betting on “relative value opportunities” in the region’s equity markets, it’s also using a “different playbook,” Diggle said. The fund has been buying gold options, which would be a “good proxy” for rising inflation, a dollar crisis and any default by the U.S. government, Diggle said. Gold futures topped $1,660 an ounce, extending a rally to a record, as escalating concern that the global economy is losing momentum spurred demand for the precious metal as an investment haven.

LAVA is also trading options on interest-rate swaps and bond markets to bet on moves in interest rates and government debt, and is buying credit-default swaps, Diggle said.

“I’d rather be long corporate bonds than government bonds in essence because I see private prosperity and public squalor,” Diggle said. “I just came back from Italy where the cars are expensive but the roads are bad. People have money but governments don’t.”

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