After spending most of the year in the red, global macro hedge funds are beginning to gather some performance momentum, with the Hedgefund.net index of 149 funds posting a 0.84% gain in October. The index is still down 0.47% this year. It is poised to post its first loss since the 1994 bond market rout sent it to an 8.73% decline.

The performance is especially painful for many managers because last year’s 19.60% average return sent billions of dollars flowing into the sector. Hedge Fund Research LLC, a Chicago company that tracks hedge fund asset flows and performance, estimated that as of September 30, there were $103.2 billion invested in macro funds.

Macro funds have the widest investment mandate within the hedge fund universe.

Portfolio managers are free to invest in – or sell short – anything from bonds and stocks to commodities and derivatives.

Most macro managers use some combination of fundamental macro research – analyzing the GDP growth rates of America and the E.U. for instance – and computer-driven quantitative models to inform their trades.

This year’s woes are due largely to a drop in volatility across numerous widely held asset classes, especially American stocks and commodities. The origin of this problem is that many traders and investors have lacked conviction as to whether the American economy was really entering a sustained recovery or was simply reflecting the result of tax cuts and historically low interest rates. Without a clear consensus, traders have been unwilling to take large positions.

The Merrill Lynch volatility index, the VIX, is showing the lowest levels of American equity volatility in over a dozen years. What this means is that many widely held stock prices are caught in narrow trading ranges, offering little opportunity for the rapid short-term trading profits that many hedge-fund traders prefer.

What has helped the burgeoning performance rally for macro funds – the September index was up 0.15% – has been a combination of an American Treasury bond rally, oil futures prices continuing to trend up, and the drop in the dollar, relative to the euro and yen.

The 10% drop in the dollar – due to the belief that the American trade deficit will continue to expand given the cash needs of the war in Iraq – has been a particularly welcome development for many hedge funds.

Many funds have been painfully short dollar futures all year in anticipation of its drop relative to other currencies.