Hedge funds that profit from turbulence in the financial markets are beating stock, bond and commodity investments for the first time in five years.

Volatility hedge funds returned 7.3 percent this year through August, according to the Newedge Volatility Trading Index, which started in 2003.
Hedge funds overall lost 4.8 percent in the same period, according to Hedge Fund Research Inc. in Chicago.
``Nobody knows the direction of the markets or economy at the moment, and we're profiting from that uncertainty,'' said Trevor Taylor, 35, co-chief investment officer at Miami-based Innovative Options Management LLC.
The firm's $90 million hedge fund rose 12.3 percent this year through August, after returning 25 percent in 2007.
Price swings that helped Taylor started with the collapse of subprime mortgages that have left the world's biggest banks with $506 billion of writedowns and credit losses in the past year, according to data compiled by Bloomberg.
The Standard & Poor's 500 Index fell 19 percent since October as credit dried up and the U.S. economy edged to the brink of recession.
The average equity fund fell 8.38 percent, corporate fixed- income funds declined 4 percent, and energy and basic-materials stock funds dropped 6.36 percent in the first eight months of the year, data compiled by Chicago-based HFR show.
The S&P 500 fluctuated by more than 1 percent on 71 trading days this year, the most since 2003 and exceeding the 61-day annual average since 1928, said Howard Silverblatt, an analyst at S&P in New York. The index may have its most volatile year since 2002, when there were 125 swings of more than 1 percent.
There are about 50 volatility hedge funds globally managing a combined $9 billion, according to Newedge Group, owned by Paris-based Societe Generale SA and Credit Agricole SA. The funds seek to make money from buying and selling options contracts on securities and indexes.
Traders usually purchase options when they expect market fluctuations to increase and sell the contracts when they expect it to fall.
Options give the right to buy or sell a security for a certain amount, the strike price, by a given date.
``We've been pleased with our investments,'' said Antonio Munoz, chief executive officer of New York-based EIM Management USA, a unit of EIM Group of Nyon, Switzerland, which invests $15 billion in hedge funds and has held volatility funds since 2002. ``They make money when others don't. They act like insurance in one's portfolio.''
U.S. stock swings, according to the most-watched gauge, the Chicago Board Options Exchange Volatility Index, rose to a five- year high of 32.24 on March 17, the day after the Federal Reserve rescued Bear Stearns Cos. It peaked at 45.74 in October 1998, when the collapse of Long-Term Capital Management LP destabilized financial markets worldwide.
(Source: Bloomberg)