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

By Investor Empires On Jan 6, 2025

(Bloomberg) — A former hedge fund manager whose company made billions during the global financial crisis is ready to pounce on volatility again, seeing threats to market stability at a level not seen since 2008.

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

Diggle, whose company made $3 billion between 2007 and 2008, is raising money for a hedge fund and managed accounts designed to generate huge returns in market crashes and profits from bets on the rise and fall of stocks in quieter periods.

The idea to create the new fund came after the company developed a model for using artificial intelligence to read large amounts of public information. Daigle said it helped discover companies in the Asia-Pacific region that had a high probability of going bust, due to risky behavior such as high leverage, asset-liability mismatches or even outright fraud. A stock portfolio will also contain individual stocks or indices as bullish bets.

Diggle is making its biggest push into volatility trading, after shuttering Artradis Fund Management Pte in March 2011. The then-Singapore-based hedge fund firm saw its assets swell to nearly $5 billion in 2008, buoyed by profits on bets on market turmoil and… Banks, but later fell victim to a shift in the markets resulting from unprecedented intervention by the central bank.

“The number of fault lines that exist today is greater, and the chances of something going wrong are much greater, but the price of risk is lower,” Daigle said, comparing conditions under more than a decade of easy monetary policies. “So we’re in a fairly similar situation to where we were from 2005 to 2007.”

Potential flash points include extended valuations for US stocks, a glut in the country’s prime office market, rising federal debt and tight credit spreads. Daigle said a new “bull market generation” of traders who entered the industry after 2008 has pushed a small group of US technology and cryptocurrency stocks to dizzying heights. At the same time, it is cheaper to buy the tools needed to protect against volatility, he added.

Elsewhere, he pointed to rising geopolitical tensions and problems with China’s shadow banking system. Individual gamblers, the growing power of passive mutual funds and high-frequency traders are likely to worsen the paths, as happened in March 2020 and August 2024, Volps said in a marketing document for the new fund.

Daigle, a former head of various teams at Lehman Brothers Holdings Inc., co-founded Artradis with Richard Magidis in 2001. In the run-up to the financial crisis, his company used over-the-counter options and variance swaps that it bought from banks as bets. On spikes in stock volatility.

Artradis also bundled credit default swaps at one point for more than $8 billion of notional value on the same banks that sold them those back-risk derivatives. It has been used partly as a hedge against banks’ default if markets collapse, and partly as a bet on mismanagement of risk by lenders.

Diggle said Lehman Brothers’ credit default swaps settled at 367 times the price Artradis paid after the bank declared bankruptcy in September 2008, while the same instrument at UBS Group AG generated a return of about 20 times.

Hedge funds that only bet on increased volatility tend to lose money during quieter days in the markets. Since the closure of Artradis, the Diggle family office has invested in avocado orchards in New Zealand, property in Germany, a biotech company in the UK and stocks that could benefit from European rearmament in the wake of Russia’s invasion of Ukraine.

While Vulpes has occasionally manipulated volatility trades over the years, it had never made a serious effort at it previously, partly due to the absence of trading opportunities that could help offset such losses, Diggle said. The capital structure arbitrage operations that Artradis used to support tail risk betting losses in its early years have become less profitable.

At 60, Diggle will no longer be returning to day trading, choosing to advise on overall risk management for the volatility portion. Singapore-based Robert Evans, who has worked at companies including Citigroup, will be the fund’s lead portfolio manager.

“It’s a fool’s game to try to say the market will definitely crash in 2025, because that’s human behavior,” Daigle said. However, “everyone needs to start thinking about their hedges again.”