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Carry

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What they found

The authors generalize the currency carry idea to every asset class: carry is the return an asset earns if its price does not change. For bonds it is the yield plus roll-down, for commodities the futures curve slope, for equities the dividend yield minus the financing rate, for options the theta, and so on. Across equities, bonds, commodities, currencies, credit, and options from the 1980s to 2012, high-carry assets outperformed low-carry ones in each class, a diversified carry portfolio had a Sharpe ratio above 1, and carry predicted returns both across assets and over time. Carry strategies had drawdowns concentrated in global recessions and liquidity crises.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

What you can use

  • Ask of any position: what do I earn if nothing happens? That is carry, and it has predicted returns in every asset class.
  • A carry portfolio diversified across asset classes has historically been far smoother than currency carry alone.
  • Carry across all assets still crashes together in recessions and liquidity events, so it is not immune to the classic carry risk.

Caveats

Requires futures and derivatives across many markets; the equity and option carry definitions involve choices. Practitioner authors; a free SSRN version exists.

Tags: carry, multi-asset, futures, risk-premium

Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.