Stephen Diggle, who co-founded a hedge fund that made $2.7 billion in the depths of the global financial crisis, said the resurgence of volatility is here to stay as bonds and stocks are both way overvalued. Markets have been roiled by massive price swings over the past week, punishing investors who were betting on an extended period of calm. Stocks slumped and bond yields surged on concern a stronger US economy will stoke inflation and push up interest rates faster than the market has priced in.
The Cboe Volatility Index (VIX) surged to a more than two-year high on Tuesday. “In the short term I think volatility can remain elevated and the VIX as well,” said Diggle, CEO of Singapore-based family office Vulpes Investment Management. “There have been so many persistent volatility sellers for such a long time that the market has been seriously out of balance for a while.”
Diggle said he’s gained from the surge in volatility after buying December put options on the S&P 500 two weeks ago at strike of 2,200 as “crash protection.” “The lack of fundamental value in either bonds or stocks is the greatest risk,” Diggle said. “All markets must eventually come back to attractive value and this is a very, very long way down for both stocks and bonds. The broad economy and corporate profitability are both strong, and that’s important, but value is what provides the best support and it’s nowhere to be seen.” Diggle set up Vulpes in 2011 after liquidating the volatility funds at his previous company, Artradis Fund Management, when price swings declined. But he doesn’t plan to restart a long volatility fund. Central bank pledges to clamp down on volatility has smothered price swings and there are also “still far too few” listed long-volatility vehicles, he said. “Most are still over-the-counter products offered by banks that in the last crisis were the epicentre of the insolvency,” Diggle said. “So if you buy a long volatility product from a bank, you must always be worried whether they will be able to pay you if volatility spikes enormously.”