Beyond the pigeonhole of pure stock or pure bond mutual funds are so-called alternative funds, which seek out and follow hybrid strategies. TheStreet.com Ratings has reviewed the best-performing open-end funds in the third quarter that fall outside of usual fund categories.

In the third quarter, the carnage was real. The Diamonds Trust ( DIA), which tracks the performance of the Dow Jones Industrial Average, slid 3.8%, while the S&P 500 Index sank the SPDR Trust ( SPY) by 8.9%. The PowerShares QQQ ( QQQQ), which gauges the Nasdaq 100 Index, collapsed 13.8%.

By comparison, the meager returns generated by the top 10 hybrid-strategy funds look pretty good. The only exception is the 21.3% return generated by the Direxion Dollar Bull 2.5X Fund ( DXDBX) -- that performance looks plain great. The U.S. Dollar Index, tracked at 250% leverage by this fund, appreciated 9.6% in the quarter as the economic prospects of the U.S. appeared relatively stronger than those of Europe, Japan and the U.K.

With a flexible portfolio strategy, the Comstock Capital Value Fund ( DRCVX) ranked second with a return of 5.5% for the most recent quarter and 21.2% over the last 12 months.

At the beginning of the third quarter, the Comstock fund shifted to holding 87% U.S. Treasury bills and bearish positions of 45.8% in bets against the S&P 500 with futures and puts and 23% equities shorts on Wells Fargo ( WFC), Nokia ( NOK) and SAP ( SAP).

However, the Comstock fund's 2.6% portfolio position in PowerShares DB US Dollar Index Bearish Fund ( UDN), which fell 8.4%, and 2.2% position in StreetTracks Gold Trust ( symbol), which sank 6.9%, tempered what could have been an even stronger quarterly return.

Lastly, the Direxion 10-Year Note Bull 2.5X Fund ( DXKLX) is up 3.4% for the quarter and 21.7% for the year, a direct beneficiary of the flight to quality during the current market turmoil. Similarly, the Pimco Stockplus TR Short Strategy Fund ( PSTIX) gained 3.1% in the last three months and 28.1% in the last 12 due to its bets against the stock market.

10 Best-Performing Alternative Investment Mutual Funds in the Third Quarter
Fund (Ticker), Rating Total Return 3 Months Total Return 1 Month Total Return 1 Year Objective
Direxion Dollar Bull 2.5 X Fund (DXDBX US), U 21.33% 4.01% NA Currency
Comstock Capital Value Fund (DRCVX US), D 5.46% 10.57% 21.17% Flexible Portfolio
Managers AMG Funds - FQ Global Alternatives Fund (MGACX US), U 4.56% 0.98% 0.53% Derivative-Asset Allocation
Direxion 10 Year Note Bull 2.5X Fund (DXKLX US), U 3.44% -1.66% 21.65% Derivative-Asset Allocation
TIAA-CREF Institutional Real Estate Securities Fund (TIREX US), D 3.10% -0.86% -13.54% Sector Fund-Asset Allocation
PIMCO StocksPlus TR Short Strategy Fund (PSTIX US), A+ 3.09% 3.63% 28.12% Derivative-Asset Allocation
ING GET Fund US Core Portfolio-11 (IGUCX US), U 2.20% -0.63% -11.18% Flexible Portfolio
Pioneer Protected Principal Plus Fund II (PPFAX US), C 1.65% 0.77% 3.50% Balanced
Morgan Stanley FX Series Funds - Alpha Plus Strategy Portfolio (FXPAX US), U 1.57% -1.82% -0.10% Currency
Marketfield Fund (MFLDX US), U 1.56% -1.33% NA Flexible Portfolio
Source: TheStreet.com Ratings and Bloomberg

For more information, check out an explanation of our ratings.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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