In the ever-evolving landscape of finance, the stories of those who dare to take calculated risks paint a compelling picture of human ambition and ingenuityOne such figure is Steve Diggle, a former hedge fund manager known for his remarkable ability to profit during the tumultuous global financial crisis of 2008. After making billions by betting against the market, he is back, aiming to capitalize on what he perceives as unprecedented threats to market stability.

Diggle's strategic return is anchored by his family office, Vulpes Investment ManagementIn an unexpected turn of events, they are slated to raise $250 million in the first quarter of this yearThis fundraising is significantly shaped by the previous success Diggle enjoyed, when his team reaped a staggering $3 billion just before the financial upheaval a decade and a half agoThis time, his strategy revolves around a hedge fund and managed accounts, both designed to excel in periods of market decline while simultaneously leveraging stock movements during more stable times.

The genesis of Diggle's latest venture stems from the application of artificial intelligence

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Vulpes developed a sophisticated model that sifts through vast amounts of public data, allowing them to identify companies in the Asia-Pacific region that are on the precipice of failure due to issues like excessive leverage, asset-liability mismatches, and outright fraudSuch technological innovation underscores a significant shift in how financial analysts approach market predictions, relying more on data and less on instinct.

Diggle's insights highlight a broader issue: the current financial environment is riddled with fault lines and vulnerabilities, akin to the pre-crisis atmosphere of 2005-2007. He characterizes this situation as one of heightened risk, where the potential for significant market errors has increased even as the cost of hedging has declinedThe resonance of past market behaviors serves as both a warning and a guide, suggesting that awareness and preparedness are critical in navigating these turbulent waters.

Among the potential catalysts for a new financial crisis, Diggle points to elevated valuations in U.S

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equities, an oversupply of high-quality office real estate, increasing federal debt, and tighter credit spreadsAdding to the precariousness of the situation are the newer generations of "bull market traders," whose investments have driven certain sectors—especially tech stocks—into dizzying heightsHerein lies an intriguing juxtaposition: the same conditions that foster high returns for some could very well lead to catastrophic losses for others.

Diggle’s assessment further includes the rising tides of geopolitical tensionsHe warns that the participation of retail investors, the growth of passive investment funds, and the actions of high-frequency traders could exacerbate market crashes, much like the situations seen in March 2020 and August 2024. These patterns of behavior could mirror historical crises, providing a sobering reflection of how modern dynamics can mirror old pitfalls.

Transitioning from his past life at Artradis Fund Management Pte—where he mastered volatility trading—Diggle has seen the evolution of market conditions firsthand

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The firm, which gained prominence for its strategic bets against market turmoil, eventually succumbed to the very forces it had mastered as central banks intervened dramatically in financial systems around the globeSince the firm’s closure in March 2011, Diggle has redirected his focus and interests toward areas that extend beyond traditional trading.

Previously a leader within Lehman Brothers, he co-founded Artradis in 2001, where his expertise in leveraging options and swaps provided footholds during the turbulence preceding the financial collapseThe inherent risks of systemic failures were counseled by strategies that complimented risk hedging with financial instruments designed to shelter against downturns.

The financial acumen forged through the Artradis experience was highlighted by Diggle’s deployment of credit default swaps (CDS), which accumulated a notional value upwards of $8 billion

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These instruments were instrumental in hedging against banks’ potential failures amid market downturns and utilized to speculate on banks' risk management capabilities.

Interestingly, Diggle thereafter witnessed a staggering gap in the settlement prices of CDS contracts when Lehman Brothers filed for bankruptcy in September 2008, where the payouts were significantly higher than their market value just before the collapseA lucrative reality for those willing to wield sophisticated financial instruments creatively and with foresight.

Understanding volatility as an essential characteristic of markets, Diggle recognizes that hedge funds that solely focus on betting against it can struggle in calmer daysSince the downfall of Artradis, his family office has diversified, investing in everything from avocado orchards in New Zealand to real estate in Germany and cutting-edge biotechnology companies in the UK.

As Diggle reflects on the landscape of volatility trading, he acknowledges that while Vulpes has occasionally dipped its toes into this sector, it has never fully engaged

This caution arises primarily from a scarcity of favorable trading opportunities and a general hesitance in the face of potential losses that could arise from mismanaged volatility strategiesContrast this with the earlier Artradis days, where they shrewdly balanced capital structure arbitrage with tail risk bets to maintain a foothold in competitive markets.

Fast forward to today, Diggle notes that the environment has radically shifted, and the avenues for profitable arbitrage are increasingly scarce, impeded by robust competition and evolving market regulationsThe dynamics of trading have incrementally changed, forcing veteran traders to rethink their established strategies.

Now at 60, Steve Diggle is poised to take on a more advisory role, stepping back from hands-on trading to provide insights into managing overarching risks associated with market volatilityWith Robert Evans, a seasoned professional from Citi, at the helm as the primary portfolio manager, Diggle emphasizes the folly of trying to predict market crashes definitively