Artradis, run by Steve Diggle, used to be Asia’s largest hedge fund. During the global financial crisis and “The Big Short,” his tail-risk fund, which is a collection of securities that profit from extremely unfavorable market conditions, doubled its assets and gave investors a $3 billion return.
As markets failed and asset prices plummeted, Diggle’s approach of being long volatility and short credit risk—with an emphasis on the then-emerging credit-default-swap market—proved incredibly effective. When investors understood how poorly risk had been mispriced in a lengthy bull market that dated back to 2002, the fundamentally bearish approach proved to be extremely profitable.
When extraordinary and coordinated quantitative easing by the world’s leading central banks reduced volatility to the point that the Artradis model was no longer applicable, Diggle closed his long volatility fund in 2011.
However, since 2011, things have changed, and Diggle believes it’s time to relaunch his plan. “I see a lot of the same complacency and mispricing of risk we witnessed before the global financial crisis began to bubble in 2007,” he said in an interview with MarketWatch.
Diggle stated that he will be operating his new Vulpes AI Long/Short, or VAILS fund, from London instead of Artradis’s previous home of Singapore, because he thinks the opportunity set that markets give to it is fairly similar. The fund was established on May 1.
But there are some distinctions. Banks and mortgages accounted for a large portion of the system’s hidden risk and over leverage in 2005–2008. According to Diggle: “In 2025 financial markets are riddled with several fault lines, but now the bubble and the dangerous leverage is centered on private equity and private credit.”
Once more, the assets are mispriced or overpriced, poorly regulated, illiquid, and difficult to exit without suffering losses or devaluing other holdings.
First, Diggle stated that “central banks are simply not in a position to implement similarly accommodative monetary policy again” due to the massive budget deficits and debts generated during a decade of QE and the subsequent global epidemic.
Second, the system is once again experiencing inflation. China is no longer exporting deflation after 40 years, since globalization is reversing and supply chains are becoming unstable due to protectionist economics.
Third, the security of asset markets is directly threatened by geopolitics.
Fourth, by most valuation measurements, the U.S. equities market, which makes up two-thirds of the global market, is currently pricey.
Lastly, he continued, ‘ “the world’s largest and most powerful economy is being piloted by a disruptive and, some may contend, reckless captain whose unpredictability and irrationality have generated wild market turbulence.”
Bearish sentiments are advantageous for other tail-risk funds and strategies, of course.
What does he add, then? Diggle immediately responds, “I did it before.”
He emphasized that during the global financial crisis, he never gated Artradis. Artradis always permitted clients to withdraw their money right away, in contrast to many funds during those times of erratic swings and illiquidity. In order to balance losses elsewhere, investors were often forced to liquidate their tail-risk hedges back then.
Additionally, Diggle is quick to note that “I’m not a permabear, like the Albert Edwardses and Nouriel Roubinis of this world.” His views on investments are tactical rather than ideological. The source of his concerns regarding asset prices is straightforward: “Not enough people have hedges.”
Similar to the strategy that worked so successfully for Diggle and his investors in 2008, VAILS plans to combine credit-default swaps with specific long volatility bets in equities and indexes.
The difficulty for investors managing tail-risk funds is to remain afloat while the market rises, as it typically does.
“We were able to carve out sufficient returns in a low-volatility environment through capital arbitrage,” Diggle stated.
This is attempting to take advantage of variations in the values of various securities issued by the same issuer.
It seems unlikely that VAILS will use capital arbitrage tactics this time. Over the past 15 years, markets have become more efficient, at least in certain ways.
VAILS plans to conclude the long volatility/CDS strategy with a supplementary trading model while positioning for the correction that Diggle feels is inevitable and producing some alpha to satisfy investors in the interim.
An AI engine built into his proprietary model searches through mountains of company data and conversations to identify assets that are unusually prone to failure, whether due to excessive risk, fraud, or overvaluation.
