How hedge fund managers bet on the direction of the dollar and oil was the story of macro funds in 2004. The Hedgefund.net index of 147 funds was up 4.99% last year, but spent much of the year down as volatility across most global asset classes hit 15-year lows. When volatility returned, funds were able to make more money, as evidenced by their 2.55% return in December and 2.87% return in November.

Macro funds, which trade in all sectors, were drawn to oil and currencies as these were the only areas where volatility was consistent. In the case of oil, the movement was up – a barrel of Brent Light crude closed at $42.90, up 23.3% for the year. Though it had been as high as $53 at one point, what was really compelling for traders was the continuation of what is now a two-year rally in oil prices. Many hedge funds used a combination of heavy leverage and long-term futures to place big bets to play this trend. Moreover, the continuing drop in the value of the dollar – it declined 4.2% against the British pound in November alone – also provided some opportunity for funds.

A case in point is the $384 million Brummer & Partners Latitude fund, which led the index all year and returned 47.36%. The Stockholm-based fund generated its returns by shorting the dollar while buying corporate bonds, said people familiar with the year-old fund. The fund’s portfolio manager did not return a call.

On the downside, Quest Partners, a $270 million fund based in New York, was down 27% through the end of November. The fund’s flagship Alphaquest Composite fund was long on volatility all year in a series of futures and bond bets, said a fund-of-funds manager who has examined the fund. Nigol Koulajian, the fund’s principal, was not available to comment. However, Mr. Koulajian, in an interview with Institutional Investor’s Alternative Investment News, said the contraction in volatility – which drove bond and futures prices lower – was exacerbated by the fund’s heavy leverage.

The pain of betting against oil and for the American dollar was typified by RAB Capital, a London-based hedge fund whose four funds were at the bottom of the Hedgefund.net index all year. The $1.5 billion fund’s founder and principal, Michael Alen-Buckley, said that the fund shorted oil futures at $35 a barrel, betting there was no life left in the rally. Worse, the fund’s traders bought futures on the dollar at the same time. The fund’s four portfolios were down an average of 18% Through November. December’s numbers have not been released yet.