Singapore-based Vulpes Investment Management launched new investment funds in May, reviving strategies from a hedge fund that peaked at nearly $5bn before the 2008 financial crisis.
The family office, founded by Stephen Diggle, Co-Founder of Artradis Fund Management – a hedge fund that grew from $4m in 2002 to nearly $5bn at its peak in 2008 – is reintroducing a crisis alpha approach refined by the now shuttered firm, but with a few tweaks.
The approach in question is a barbell strategy that targets market dislocations and opportunities to profit in both volatile and stable periods. It does so through a tail-risk-focused fund designed to provide institutional-grade protection against market downturns, while using machine learning-driven long-short equity strategies to generate returns during calmer periods.
The market-tested approach, alongside the AI model, is further supported by the team who have spent decades navigating multiple market cycles and dislocations.
“I’ve been trading ever since the ‘87 crash – in fact, everybody here was actively trading during the GFC: Steve and I traded through all the ‘90s dispersion events: Peso crisis, Asian Contagion,” says CRO and Vulpes Co-Founder Bert Verdicchio.
Comparing the current launch to Artradis’s peak – when it returned $2.7bn to investors in the mid 2000s – Verdicchio explains: “It’s a very interesting environment right now for dispersion, tail risk, and overall market turbulence.”
The barbell structure
Vulpes flagship strategy is built around a 50/50 barbell structure, while also offering funds that are purely tail risk, having launched a Tail Risk management advisory company, Vulpes Portfolio Solutions Partners.
In the barbell strategy, on one side is a tail-risk portfolio – with the simplest expression being the purchase of a put on the S&P 500. However, the differentiator is the active budget for the recapture of the premium.
“We break market risk into three categories: a gentle drop in the market, a medium drop, and a catastrophic drop,” explains Wilson Er, Macro Volatility and Tail Risk Portfolio Manager.
He adds: “Our strategy offers protection similar to a put during market stress, but with a lower cost in calm markets. By actively managing positions within our framework, we reduce the steady losses that usually come from holding long-term protection.”
The tail risk strategy operates across geographies, asset classes, and instruments – including equities, credit, FX, and commodities, explains Er, previously a macro volatility trader at JP Morgan.
Such diversification proved beneficial in April, for instance, when Vulpes was able to capture the equity drop of the first two weeks to then take advantage of the gold spike the week later.
Balancing the tail risk exposure is a long-short equity strategy, supported by an adaptive AI/ML model designed to continuously refine its edge.
The system identifies high-conviction short candidates – often stocks at risk of a 90% decline or delisting – using public data to identify companies in the Asia-Pacific region with a high probability of financial trouble. Triggers include risky excessive leverage, asset-liability mismatches, or even fraud.
If certain risk factors in the model change or suggest a turnaround, the team validates the fundamentals and technicals before taking and managing positions, explains Rob Evans, Portfolio Manager and former Deutsche Bank trader.
The strategy focuses on Asia-Pacific markets, including Australia, Japan, and Hong Kong. The portfolio typically holds 30 long and 40 short positions.
“The main idea is to fund the tail hedges by running a portfolio close to market neutral, hence the term yielding put” says Evans.
Why now?
Long considered too pricey during periods of low volatility, the environment for tail risk strategies is changing, with Verdicchio highlighting two catalysts.
First, the dispersion and market movements driven by this epochal period in geopolitics, which create opportunities for those nimble enough to take advantage. The second, is the currently acceptable cost of tail protection.
“After 2007 and into Brexit, tail risks became expensive – options and credit default swaps were priced high due to elevated risk. Similarly, following Trump’s ‘Liberation Day’, we again saw tail risk protection pricing spike. Now, pricing has returned to pre-election levels. We saw a clear demonstration of risk in April, but complacency has since returned to those earlier levels,” he says.
Vulpes aims to deliver results similar to those seen by Artradis during the GFC, when the firm’s strategies returned 60% in the barbell fund, 90% in the pure tail fund, and 110% post fees in the leveraged version of the tail fund – fuelled by equity volatility and financial sector CDS exposure. Today, Vulpes has expanded its convexity engine across four to five asset classes.
“Hedging is a meticulous act – everybody can buy a put, but for anyone to have a robust portfolio of hedges is difficult; it’s not just buying one protection, it’s buying five protections every fortnight and managing it day in, day out,” says Verdicchio.
“We have done it before, and we are doing it again.”
