Hedge funds are now turning to the U.S. dollar for carry trades after pulling back from the Japanese yen for bets on emerging markets two weeks ago, according to CitiGroup.

Investors retreated from using the yen for this investment strategy two days after the Bank of Japan raised interest rates from 0.1% to 0.25% on July 31.

That interest rate hike and investors' expectations the Federal Reserve will cut rates by more than three-quarter points this year tarnished the old strategy of betting on U.S. growth and low Japanese borrowing costs, Bloomberg reported.

"We've seen our positioning sentiment on the U.S. dollar starting to turn much more bearish," Kristjan Kasikov, Citigroup's global head of FX quantitative investor solutions, told Bloomberg. "An environment where people are speculating about rate cuts has fueled risk appetite."

Read Also: What Investors Should Know About Yen Carry-Trade Unwinding That Is Sending Global Markets Into A Tailspin

The dollar is trading at its lowest point since March and hedge funds have been using it since Aug. 5 to buy emerging-market currencies, such as the Brazilian real and Turkish lira, Kasikov said.

But Citi expects global carry trades will perform well for a limited period as turbulence around the U.S. presidential election could lead to another surge in volatility, Kasikov said.

"We've been concerned about the FX carry trade for a while now," he told Bloomberg. "The U.S. elections, the political calendar, will introduce volatility to the market and risk aversion that will weigh."

Price Action: Exchange-traded funds that track hedge funds trended downward into mid-day trading on Tuesday.

• IQ Hedge Multi-Strategy Tracker ETF (NYSE:QAI) slipped 0.22%
• Simplify Interest Rate Hedge ETF (NYSE:PFIX) declined 0.17%
• UPAR Ultra Risk Parity ETF (NYSE:UPAR) gained 0.73%
• Cambria Value & Momentum ETF (BATS:VAMO) dropped 0.88%
• ProShares Hedge Replication ETF (NYSE:HDG) fell 0.22%

Read Now:

• Traders Resume Yen-Dollar Carry Trade As Bank of Japan Pledges No Rate Hikes During Market Volatility

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