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Volatility Hedge Funds Outperform Industry First Time Since 2003

Bloomberg – 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 climbed 7.3 percent this year through August, according to the Newedge Volatility Trading Index. 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 same period, data compiled by Chicago-based Hedge Fund Research Inc. show.

“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.

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