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Where some of the world's top hedge funds will invest in 2019 amid increased volatility

Some of their strategies include shorting the dollar versus EM currencies and betting on Japanese stocks and the yen.

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The main reason for optimism among funds is the increased volatility in markets that began in 2018.

New York

MACRO managers, who have struggled for much of the last decade, are once again expecting a winning year. This time, they might be right.

The main reason for optimism is the increased volatility in markets that began in 2018 with rising interest rates in the US, trade wars with China and populist politics in Italy. The turbulence helped several old macro hands including Paul Tudor Jones and Alan Howard profit after posting losses or sub-par gains.

"There is a lot more differentiation in this environment than there's been for the last 10 years," now that every major central bank is no longer lowering rates simultaneously, Adam Blitz, chief investment officer at Evanston Capital Management, said on Bloomberg Radio about why he's bullish on macro funds.

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Other investors agree. Last year, they threw US$6.7 billion at these managers, who wager on macroeconomic trends, while the rest of the industry suffered outflows of US$35.3 billion, according to eVestment. Here are some macro trades that investors, hedge fund managers and family offices say should make money in 2019.

Short the dollar vs emerging market currencies

Salman Baig, an investment manager at Unigestion SA, said he sees the US dollar steady or falling against emerging market currencies, a turnaround from last year when the greenback rose against all major currencies except the Japanese yen and the Mexican peso. Macro forces that supported the dollar in 2018, such as higher relative growth and a Federal Reserve that was raising rates, "look likely to stabilise or reverse in 2019", said Mr Baig. Gridlock in Washington could weigh on the dollar as well, he said.

Morgan Stanley recently told clients that a weaker dollar in 2019 could reverse several other major investment themes that have driven markets for the last few years. Emerging market credit could do better than US high-yield bonds, value stocks could finally outpace growth equities and US shares may lag the rest of the world.

Turkey in particular should benefit from expectations that the Fed and European Central Bank will be less aggressive in raising rates this year. The Turkish central bank has said it will maintain tight monetary policy until its inflation outlook improves, even as the economy decelerates sharply.

Go long European carbon credits

Robert Gibbins, head of Autonomy Capital, said he expects carbon allowances, the hottest commodity of 2018, to move higher. Carbon futures, which reflect the price factories and utilities pay for their emissions, soared last year as the European Union implemented reforms aimed at reducing a supply glut, mainly by cutting the amount of permits auctioned. Mr Gibbins said these credits, now trading around 23 euros, could climb to at least 35 euros, the price at which he estimates they would begin to do their job of destroying the viability of coal and other dirtier sources of energy.

Buy CDS on corporate bonds

One macro manager said he's buying credit default swap (CDS) protection on some investment-grade bonds. Companies that issued bonds protected by quantitative easing in the US, Europe and Japan have seen downgrades and their debt drop as a result. The macro manager pointed to Vallourec SA in France, DIA in Spain and General Electric Co in the US.

Consider copper

A family office executive said the metal is a good indication for what's going on in China. If the trade war ends, copper prices will shoot up.

Bet on Japanese equities and the yen

Last year, incomes and capital expenditures rose, making 2018 Japan's best year since Abenomics began. In 2019, Japan's emperor is resigning and the country is hosting the G-20 summit and the rugby World Cup, all events that should help boost the yen and Japanese stocks, a macro manager said. BLOOMBERG