Asian hedge funds Vulpes, started by industry veteran Stephen Diggle, and Tantallon Capital are emerging as winners in a volatile August that has wiped out more than $3.8 trillion from global stock markets.
Diggle, who made a fortune during the financial crisis, said his long Asian volatility and arbitrage hedge fund LAVA gained about 4 percent in the first six trading days of the month.
The fund gained as its bets on volatility going up paid off as the US government struggled to piece together a deal addressing its long-term fiscal problems and S&P cut its AAA rating.
Tantallon Capital, founded in 2003 by former Morgan Stanley wealth management executive Alex Hill and Nicholas Harbinson, who earlier worked at Merrill Lynch and Goldman Sachs, gained 4.15 percent in its flagship fund last week, according to a letter to investors seen by Reuters.
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By comparison, Asian shares as measured by the MSCI index of Asia-Pacific stocks outside Japan plunged 8.7 percent last week and extended losses to 11.8 percent on Monday.
"Everyone is just trying to reduce their exposure to equities principally in a very thin August market and that has caused a very significant volatility," Diggle said.
"We are basically long risk and that's going higher," said Diggle, who made $2.7 billion for investors between 2002 and 2009, mostly during the financial crisis at his previous hedge fund firm Artradis. Singapore-based Artradis shut earlier this year after double-digit losses in its main funds in the prior two years.
Vulpes manages $185 million in assets, while Tantallon manages more than $300 million.
The Macquarie Asian Alpha Fund, a $1.5 billion market-neutral long/short Asia-focused hedge fund from Macquarie Group, was up 0.4 percent last week, according to a person with direct knowledge of the matter.
The VIX, a 30-day risk forecast of stock market volatility and a key measure of investor anxiety, has been on the rise. The index often moves up when stocks sell off.
The index has soared to 48.0, its highest close since March 2009, and posted its biggest daily percentage gain of 50 percent since Feb. 27, 2007, on Monday.
Hedge funds in Asia are widely expected to suffer in the stock market selloff as many of them tend to be long biased. During 2008, they had lost about 27 percent, according to Eurekahedge Asia ex-Japan Index.
While high frequency traders are also performing well, some hedge funds are down as much as 8 percent, according to a prime broker, who did not want to be identified.
Diggle said although Asian equities had been "punched in the head really hard", investors believed the storm would pass, given that while short-term volatility jumped over the last 6 sessions, longer dated volatility was up very little.
"Where we think markets are getting it wrong is that the immediate reaction that people have to low growth numbers, you sell equities and you buy bonds...buying bonds now is completely the wrong thing to do," he said.
"Clearly any country that owes $14.3 trillion and in three years time will owe $17 trillion is not a safe heaven," the former Lehman Brothers executive said, adding that it was ironical that US 2-year treasury prices hit a record after the ratings downgrade.
"If you ask me do I think that the US government deserves a AAA rated status for its debt, I would say no and not for a very long time."
He said his firm would rather bet on increased weakness and volatility in government bond markets than on equities which looked okay at current levels.
Diggle is expecting most western governments to lose their AAA status and investors questioning the solvency of government bond markets.
"Where we see future instability is increasingly in western government and Japanese government bonds because I don't think they are a safe heaven. They are a false safe heaven."
"I don't think that lending money to governments, if they look like becoming insolvent governments, is a great idea. Full stop."