August is turning out to be a good month for Stephen Diggle’s long Asian volatility and arbitrage (LAVA) fund, having already gained 4 per cent in the firs
August is turning out to be a good month for Stephen Diggle’s long Asian volatility and arbitrage (LAVA) fund, having already gained 4 per cent in the first six days of trading reported Reuters this week. The Singapore-based manager specializes in volatility trading, and with the carnage that’s been inflicted on the markets thanks to eurozone debt contagion fears and the debacle of the US debt ceiling agreement that led to it losing its AAA rating, conditions are ripe. The CBOE VIX Index (“fear and greed index”) rocketed to USD48 on 8 August – its highest level since Q1 2009. By being long volatility, continuing unrest is playing into Diggle’s hands. “Everyone is trying to reduce their exposure to equities principally in a very thin August market and that has caused very significant volatility,” Diggle was quoted as saying. Volatility traders make money by buying options contracts in low volatility environments when the premium for so called “out-of-the-money” options falls, profiting when major dislocations causes volatility to spike.
Another firm profiting from Western economic pain is Singapore’s Tantallon Capital, its flagship equity l/s fund having gained 4.15 per cent last week. Commenting on the logic of investors still finding confidence in US bonds, despite its debt rising from USD14.3trillion to USD17trillion over the next three years, Diggle told Reuters: “If you ask me do I think that the U.S. government deserves AAA rated status for its debt, I would say no and not for a very long time. I don’t think that lending money to governments, if they look like becoming insolvent governments, is a great idea, full stop.”
