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Finding opportunities in tough times

Date: Friday, January 13, 2012
Author: Nina Pablo, The Asset

When Stephen Diggle and Richard Magides went their separate ways at the end of February 2011 after 10 years of working together at their Singapore-based hedge fund Artradis Fund Management, Diggle found that he still saw some opportunities in today’s exceptionally tough post-crisis market and wanted to continue working with other investors to further broaden their capital.

Diggle, who has expressed confidence in emerging markets in particular and in what he perceives are “underpriced non-financial equities,” reopened the doors of their office under the new name Vulpes Investment Management with these opportunities in mind.

At present, Vulpes has 15 financial professionals and runs three funds. Their Russian Opportunities Fund has been running out of their Geneva office for almost five years, while their Testudo Fund invests in alternative funds, commodities and debt. These funds are a hold over from Artradis, and were kept in their portfolio because Magides had no involvement in the two.

On May 1 of this year, they launched the Long Asian Volatility and Arbitrage Fund (LAVA Fund). LAVA is modelled after Artradis’ Barracuda Fund, which made a staggering USD2.5 billion in the 2008 crisis, years prior to which Diggle and Magides were already “unequivocally negative” about their prospects for credit prices. Diggle says that that crisis remains the most powerful experience he has had in finance.

Starting fresh

He acknowledges, however, that it’s a “terrible time to start a new fund,” citing the near-impossibility of getting money from investors. “The critical thing is there is a real drought in money going to smaller or newer managers. Money’s very tight…we’re still in crisis psychology mode; investors are clearly still somewhat traumatized.”

He also adds that while running a hedge fund in Asia is still cheaper than New York or London, overall costs have been elevated, owing to an increased need for infrastructure and software.

Vulpes, whose US$200 million seed capital was 90% from partners, is a somewhat different story. While it is a new fund, it is also in many ways a continuation of Artradis, which at its peak at the start of 2009 was managing about US$4.5 billion.

“Legally, we’re still the same entity. We’ve got the same offices, infrastructure, and a lot of the same people (10 of Vulpes’ team of 14 transitioned from Artradis). We’ve added another level of risk management technology, but other than that [Vulpes is] operating the same platform [Artradis has] been growing for the last 10 years.”

The pivotal difference is that Magides, who left to run his family office, is no longer a part of the fund. Diggle says that their parting was very amicable. “We had a few pretty successful years, but ultimately Richard and I wanted to do different things. We had worked together very harmoniously for 10 years, but we reached a stage in our lives where we had different objectives. Richard wanted to focus entirely on running his own money for a while, run his family office without external investors. What I wanted to do was to still [work with] other people’s money, but also I wanted to broaden the capital we had.”

This is why he decided to start fresh following Magides’ departure instead of continuing Artradis. He is keenly aware the investors are watching how he will handle running a fund without his partner, with whom he worked very closely. “We have a track record going back 10 years, but I think it is important to note that it is… very much a track record of me and my partner. I have half a track record,” he says, jokingly.

More involved investing

Diggle’s vision for Vulpes is strong and unique, one that he hopes will attract more and more investors over time. He has plans of moving the family businesses he has been running for several years with his brother Martin, which includes funds focussed on biotechnology and farm ownership, into the company’s platform as part of his intent to increase investor-manager involvement.

“I want all the significant operations of my family office built into the platform, which will allow other investors to invest alongside me. The idea is, by the end of the first quarter of next year, Vulpes will have a very significant amount of partner capital invested in it,” he explains. “It’s a slightly different hedge fund proposition than a normal one. We’re effectively somewhere between a family office and a hedge fund. We have several family activities, and rather than run those privately, I run them as funds, all available for investors [to be part of].”

He says that the approach he is taking to his new hedge fund is in response to “a very damaging lack of alignment between the asset manager and their customers” that he saw in 2008.

Because of this, he wants to achieve a much better level of alignment. With him acting as a seed investor in Vulpes’ funds, he begins crafting a solution because “investors can literally invest alongside me… there is that accountability and that sense of rigour that comes with managing your own money, which is a good thing. You are less rigorous when you are managing the money of other people instead of your own money.”

At its peak, Artradis had a very good spread of investors, from sovereign wealth funds to pension funds to family offices, and this kind of diversity is something that Diggle would like to continue in Vulpes – both geographically and in terms of investor type. He also chose to continue working with other investors for several reasons, one of which was of course capital.

“The bigger we are, the better the infrastructure, the better I can manage my money, the better people I can attract. Obviously, a broader platform effectively allows us to have better and stronger infrastructure. The more assets you have, the more money you make. That really is an advantage.”

That, however, is not the end of it. He also finds value in interacting with investors and getting their perspective, claiming that a significant number of their best ideas either came from investors or from their team’s working on them with investors. “When investors invest with you, good investors don’t just give their money, they also interact with you. They challenge your ideas, they give you their own ideas. You’re going to get that in conversations with other managers anyway, but when you have people’s money, they’re significantly more eager to share their thoughts.”

He remains positive that there is still hope in today’s troubled times, despite the many concerns he has about the state of today’s markets, particularly in the West. “Every market has its idiosyncrasies, every market has its opportunities,” he says. “And there are plenty of opportunities in this current environment.”