The managers are hedging against extreme outcomes with what's called a "barbell" strategy - dividing their portfolios between assets that are either very safe or very risky.

Slowing economic growth, low inflation, trade tensions and an environment in which $14 trillion of bonds carry negative yields have complicated decision-making for investors.

They have been forced to question fundamental theories seeing stocks as unequivocal beneficiaries of growth and bonds as havens in times of economic stress.

For funds that manage money across bonds, stocks and alternative assets, a barbell strategy can help balance risk, whether the global economy recovers or tips into recession.

Deutsche Bank strategist Alan Ruskin, in a Wednesday note, said "two seemingly contradictory themes" - long carry trades and extreme risk aversion as interest rates fall - can form part of the same portfolio.

Ruskin's "barbell" idea entails short-term long positions on emerging market currencies such as Mexican peso, Indian rupee and Brazilian real and long-term holdings in gold and well-rated government bonds for safety.

For Hou Wey Fook, DBS chief investment officer in Singapore, a barbell approach involves "outsized exposures" in two areas – income-generating assets and non-cyclical investments such as technology and e-commerce.

SHOPPING LIST

Included on Hou's shopping list: U.S. tech services firms that are less vulnerable to trade tensions than hardware and consumer electronics; real estate investment trusts offering an attractive and predictable income stream; slightly lower rated investment grade corporate bonds; and Chinese equities.

Kerry Craig, Melbourne-based global strategist for JPMorgan Asset Management has low-risk government bonds at one end of his fixed income barbell and high-yielding or junk bonds on the other.

In adjusting strategy, Craig and others are wrestling with the uncertainty and big headwind the protracted Sino-U.S. trade war has brought.

"The question from here is what happens next?" said Peter Wilmshurst, a portfolio manager for Franklin Templeton Investments who is pursuing a barbell strategy on a A$320 million ($225 million) equities portfolio.

"Does the trade war continue to recede or does it go hot again? Do we see U.S.-Iranian conflict go more severe which could change expectations for oil prices, inflation and interest rates? And then, where does economic growth go?"

A barbell strategy helps investors avoid overexposure to the binary outcomes from each scenario that could make or break portfolios.


GRAPHIC: Asset performance in dollar terms -

REAL RETURNS

In the current environment, the safe end of the barbell in which bulk of investment resides is in money market funds, highly-rated sovereign bonds and gold. Part of the mountain of negative-yielding developed market debt is also in numerous barbell strategies, showing investors are prepared to pay for the safety and liquidity of some assets.

Risky bets include low-rated corporate bonds and emerging market assets, including equities.

This year, global stocks <.MIWD00000PUS> are up nearly 17% with S&P 500 and the Nasdaq are around record highs while bond yields are near all-time lows. Gold reached a six-year peak recently while U.S. oil futures had a wild ride in 2018's last quarter, ranging from $76.90 to $42.36 a barrel.

Investors including Templeton's Wilmshurst are wagering on bond-proxies or instruments that provide fixed income, such as infrastructure stocks with revenues largely immune to downturns and real estate investment trusts (REITs).

At the risky end of his barbell, Wilmshurst is advocating exposure to banks he feels reward investors well, such as Standard Chartered.

"Financials should be a significant part of your portfolio," he said. "If we do see some recovery in economic momentum they'll be re-rated significantly, and if you don't you're still getting pretty attractive returns" from dividends and share buybacks.

Australia's A$154 billion sovereign wealth fund recently kicked off a programme to sell portions of its private equity and infrastructure investments, to be in more liquid assets.

"Very rarely would we make moves in the portfolio with a view over a shorter timeframe and now is actually one of those times," Future Fund chief investment officer Raphael Arndt told Reuters.


GRAPHIC: Asia-Pacific equity valuations -

($1 = 1.4235 Australian dollars)

(Reporting by Swati Pandey; Editing by Vidya Ranganathan and Richard Borsuk)

By Swati Pandey