Hedge-Fund Veteran Diggle Says Odds Against '08 Rout Redux
Hedge-Fund Veteran Diggle Says Odds Against '08 Rout Redux
(Bloomberg) -- Stephen Diggle said market turbulence is certain to surge. But he doesn’t plan to resurrect his volatility hedge funds, which made $2.7 billion in the global financial crisis, as central banks will stop a repeat of the unprecedented price swings reached in 2008.
An unexpected event -- a misstep from a major central bank or conflict on the Korean peninsula -- could spark a global rout “almost instantly,” thanks to the increased prevalence of algorithmic trading, said Diggle, the chief executive officer of Singapore-based family office Vulpes Investment Management. He is avoiding going long or short on volatility, after reaping profits on U.K. biotechnology companies, an avocado orchard in New Zealand and German real estate.
“We’ve reached a level of low volatility, and with complacency about this regime persisting, almost anything could cause a spike in volatility,” Diggle said in an interview. “It’s mathematically inevitable that volatility will spike higher at some point, but I don’t think the odds of a ‘super spike’ like 2008 are that good.”
Stimulus by central banks from Europe to Japan has damped price swings. Even though those forces are at an inflection point, with the Federal Reserve flagging it will start to reduce its balance sheet, volatility in the Treasuries market dropped this month to a record low, according to the Merrill Lynch MOVE Index. A JPMorgan Chase & Co. gauge of expected swings in global currencies has risen since June, but this year’s average of 8.8 is still the lowest since 2013.
The CBOE Volatility Index, also known as the VIX or fear gauge for U.S. equities, surged 62 percent in the three days through Aug. 10, after President Donald Trump warned North Korea it faced “fire and fury.” Still, it hasn’t traded above its long-term average of 20 since the U.S. election in November. The VIX reached a record high of 80.86 in November 2008.
While an increase in volatility is inevitable, Vulpes isn’t betting on it because the timing is “completely opaque,” Diggle said.
“As options decay with time, owning options needs excellent timing, so we are not long volatility today, nor would we advocate aggressively buying volatility today,” Diggle said. “But, at these levels, being short volatility seems pretty reckless given how elevated valuations are.”
The number of short positions on VIX futures hit a fresh peak this month.
Diggle set up Vulpes about six years ago after liquidating the volatility funds at his previous company, Artradis Fund Management, when price swings declined. A graduate of Oxford University, he worked at Lehman Brothers Holdings Inc. before co-founding Artradis in 2001.
Vulpes, with about $350 million, owns Singapore-based Kit Trading Fund, which manages a multi-strategy hedge fund that has gained 7 percent this year, Diggle said.
“We certainly don’t feel inclined to re-start a long volatility fund at this point,” he said.
The family office’s investments in U.K. biotechnology companies have returned 63 percent this year, he said. The avocado orchard in New Zealand is benefiting from a record harvest and higher prices this year, and investments in German real estate are getting a boost from a strong economy and low rates, he said.
Family offices are typically tailored to both investment and personal needs, including estate planning, philanthropy and maintaining homes.
Central banks’ pledge to clamp down on volatility, reduced speculation by private clients, the rising importance of exchange-traded funds and increased trading by computers “rather than emotional humans” have smothered price swings, Diggle said.
“Volatility is the great financial mystery,” he said.
To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.
To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Garfield Reynolds