Strategy
Carry Strategies: FX, Futures, Equities
Carry strategies earn the yield differential between long and short legs. The trade pays slowly and consistently, then occasionally gives back six months in a week.
Sentivue Capital··6 min read
Carry is the return earned simply for holding a position in an asset that yields more than the cost of funding it. Long the high-yielding instrument, short the low-yielding instrument, hold, and collect the spread. The simplest of all systematic strategies, and one of the most studied.
Asset-class implementations
- FX carry: long high-rate currencies, short low-rate currencies. Classic example: short JPY / long AUD during the 2000s. Pays for years, loses in unwind events.
- Futures carry: long backwardated futures (where the front month trades above longer-dated), short contangoed. Equivalent to selling VIX term structure when the regime is right.
- Equity carry: long high-dividend / value-style stocks, short low-dividend / growth-style. Adjacent to but not identical to value factor.
- Rates carry: long longer-duration bonds, short shorter-duration. Earns the term premium when the curve is upward-sloping.
Why it persists
- Risk transfer. High-yielding instruments carry tail risk that the holder is paid to absorb.
- Behavioral. Investors systematically avoid funding-currency and short-duration positions even when the math favors them.
- Capital constraints. Some institutional players cannot hold the long-carry side (e.g., regulatory leverage constraints).
Failure modes
- Crisis unwind. Carry strategies have positively skewed daily returns and negatively skewed annual returns. The bad days are fewer but enormous. 2008, August 2015, and March 2020 each took out 12–24 months of carry P&L in days.
- Regime change in funding markets. Central bank policy shifts can flip the carry ranking faster than the strategy's rebalance cycle.
- Crowding. Popular carry trades become crowded; the unwind is correspondingly more violent.
Implementation discipline
- Pair carry with a vol or trend filter. Turn off carry positions when realized vol breaks above a threshold or when a trend filter signals the carry direction is reversing.
- Diversify across asset classes. A multi-asset carry portfolio survives where a single-asset one doesn't.
- Tail hedge explicitly. Long convexity in the funding currency or in equity downside protects the carry book.