This Star Fund Manager Sees 2008 Parallels as He Returns to the Volatility Business
By Jules Rimmer
In the realm of finance, few names resonate as strongly as that of Steve Diggle. Once at the helm of Artradis, Asia’s largest hedge fund, Diggle achieved the near-impossible: generating $3 billion for investors during volatile market conditions stemming from the global financial crisis. Now, 14 years after closing his successful tail-risk fund, he is plunging back into the market with a new strategy that echoes his past triumphs.
Diggle’s Historic Success
During the tumultuous period of 2005 to 2008, Diggle’s tail-risk fund thrived by expertly navigating the markets’ fluctuations. His unique strategy of being long volatility and short credit risk, especially through the emerging credit-default swap market, allowed him to capitalize on prevalent market mispricings. As risk was significantly underpriced during the bull market from 2002 onward, investors began to recognize the precariousness of their positions as asset prices plummeted.
However, by 2011, Diggle was forced to shut down his long volatility fund due to the unprecedented quantitative easing measures enacted by major central banks, which stifled market volatility. This measure made it challenging for his strategy to remain effective, leading him to exit the business.
A Return to Action
Now, Diggle is making a noteworthy return to the financial landscape with the launch of his new Vulpes AI Long/Short (VAILS) fund, which officially began operating on May 1, 2025. This time around, Diggle has shifted his focus to London, but he believes that the landscape bears similarities to the lead-up to the 2008 crisis. In an interview with MarketWatch, he expressed concerns over current market complacency and risk mispricing, akin to the atmosphere preceding the global financial crisis.
Shifting Fault Lines
While the previous crisis primarily involved hidden risk and excessive leverage concentrated around banks and mortgages, Diggle notes that the current landscape is fraught with established danger zones, particularly within private equity and private credit. He claims that these sectors are laden with misunderstood, poorly regulated, and illiquid assets, a combination that can lead to extreme volatility and significant divestment challenges.
Diggle has identified several factors driving this concern. First, the fiscal landscape is marred by enormous budget deficits and debt accrued over the preceding decade of QE and the repercussions of the global pandemic. Central banks, he asserts, are less equipped to implement accommodative monetary policies similar to past approaches. Second, inflation has emerged once again, fueled by a reversal in globalization and the destabilization of supply chains. Third, geopolitical tensions are presenting pronounced threats to asset security. Finally, the U.S. equity market, which accounts for two-thirds of the world’s total, is becoming expensive based on standard valuation metrics, further complicating the financial outlook.
The Anticipated Impact of VAILS
Despite the presence of other tail-risk funds, Diggle believes he brings a unique perspective. A significant point differentiating his strategy from others is his track record; Artradis never imposed gates during crises, permitting investors immediate access to their funds, keeping them insulated from the hard decisions faced by many other tail-risk funds during the 2008 downturn. In contrast to perennial pessimists, Diggle positions himself as a tactical investor, viewing the current market situation as an opportunity rooted in the lack of investor hedging strategies.
VAILS aims to fuse selected long volatility positions in various indices and stocks with credit-default swaps, emulating the successful framework used during the 2008 financial crisis. However, Diggle recognizes that the task now entails more than just waiting for market corrections while trying to generate alpha for his investors. With advancements making markets more efficient over the last fifteen years, he does not plan to implement capital arbitrage strategies as was previously done with Artradis.
Harnessing AI for Success
In an exciting twist, VAILS will incorporate an artificial intelligence engine designed to evaluate vast amounts of corporate data and communications. This engine will assist in pinpointing assets that are unusually susceptible to failure, whether due to being overvalued, fraudulent, or simply too high risk. By harnessing cutting-edge technology to inform investment strategies, Diggle hopes to enhance the probability of success for VAILS in an unpredictable environment.
Final Thoughts
As the financial markets begin to display signs reminiscent of the pre-2008 era, Steve Diggle’s re-entry into the volatility domain signals a shift in investment sentiment. His historical successes combined with an innovative approach leveraging artificial intelligence could present investors with a vital hedge against the unknown challenges that lie ahead. Will his strategy prove effective once again, or will the complexities of the current landscape thwart his ambitions? Time will tell, but Diggle is undoubtedly a figure to watch in the coming months.