* Main funds suffered double-digit losses in 2009 and 2010
* Co-founder says long volatility mandate an Achilles' heel
* Stephen Diggle plans to set up new funds
By Kevin Lim and Nishant Kumar
SINGAPORE/HONG KONG, Jan 25 (Reuters) - Artradis, once Singapore's biggest hedge fund firm with assets of about $4.5 billion, plans to wind down operations and return money to investors, in one of Asia's most high-profile fund closures.
"In the last two years, we have been losing money and that is why we are closing," co-founder Stephen Diggle told Reuters on Tuesday.
"The fact that we had a specific long volatility mandate was why the firm grew so large. But in the last two years, it has been an Achilles' heel," he added.
Diggle plans to turn his family office into an asset management firm and take over Artradis' money-making Russian Opportunities fund, as well as a second fund called Testudo that invests the partners' money.
Artradis was founded in 2001 by Diggle and Richard Magides who were former colleagues at Barings Bank in Singapore.
It set up its first fund in May 2002 to bet on fluctuations in Asian markets and made a fortune during the financial crisis when stock and bond prices plunged.
Its two main funds -- Artradis AB2 Fund and Artradis Barracuda -- had "long volatility" mandates, which meant they offered investors a good hedge against falling asset prices.
According to data from Thomson Reuters Lipper, Artradis' two main volatility funds posted double-digit losses in 2010 and 2009 as financial markets rallied.
The AB2 Fund was down 23 percent in 2010 and 27.5 percent in 2009, while the Barracuda fund lost 17 percent in 2010 and nearly 14 percent in 2009.
Dibble said Artradis currently manages around $500 million, down from its peak of about $4.5 billion at the end of 2008, as it had been returning money to investors.
Hedge funds investing in Asia have lagged the recovery in the global industry, attracting new money from investors only from the second half of 2010, industry players have said.
According to industry fund tracker Eurekahedge, more than 50 Asia-focused funds wound up last year.
The biggest hedge fund closures include Basis Yield Alpha Fund, run by the Australian firm Basis Capital, that managed about $1 billion.
The hedge fund that specialized in corporate and structured credit filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets in 2007.
More recent closures in the region includes Minerva, founded by the former head of Fortress Investment Group's Hong Kong office Stanley Ku, and Hong Kong-based Cypress Lane, started by former Goldman Sachs trader Shafiq Karmali.
DragonBack, set up in 2007 by Robert Lance, a former Hong Kong-based co-head of equities at Lehman Brothers, Matt Barnett and Philip Tye, also shut its hedge funds last year.
Sumitomo Trust Finance (H.K.) Ltd, the asset management arm of Japan's Sumitomo Trust & Banking Co , liquidated its Tactical Equity Concepts Japan hedge fund in December, according to a document obtained by Reuters.
Industry players said Artradis' poor performance stemmed from its mandate to buy volatility, which has fallen amid a rally in stocks and bonds since early 2009.
Western central banks' efforts to stabilise financial markets by buying bonds and injecting billions of dollars into the system also reduced opportunities for volatility traders.
Christophe Delorme, a director of RSR Capital which manages the Caerus Arbitrage Asia fund, said that while it was possible for volatility funds to make money in all conditions, super-sized returns were possible only in times of stress.
The Caerus fund, which is not required to be long volatility, returned 6.5 percent between mid-August and end-December.
Looking ahead, Dibble plans to remain in the industry by turning his family office into a fund manager and taking over two existing Artradis funds -- a Russian fund and an in-house fund that managed money for the partners if investors agreed.
He also intended to set up a fund that trades volatility and a second fund to invest in farms.
Dibble said his family office had been acquiring farms over the past two years, and he plans to inject the farms into a fund as many investors have expressed interest in buying farmland amid soaring food prices.
"What we need to remember is that these managers are very smart, enterprising and have a deep understanding of the fickle markets of Asia, and we will quite likely see them make a comeback in some form or the other," said Aradhna Dayal, editor of hedge fund portal AsiaHedge in Hong Kong. (Editing by Muralikumar Anantharaman)