Many sophisticated quantitative investment managers employ systematic carry strategies in their portfolios, yet they remain poorly understood by the investing public due to a tendency to overgeneralize from a limited set of specific examples. Carry strategies are, in fact, a general class of investment opportunities, and can capture a wide array of phenomena in futures and forward markets. In this paper, we will explore three different types of carry trades, including relative value and directional approaches. We will attempt to debunk the perception that carry is, by definition, a highly-levered relative value strategy, and demonstrate that there is not a “one size fits all” approach to the carry trade.
In a 2016 Campbell & Company white paper entitled “An Introduction to Global Carry,”1 the basic premise of generalized carry was introduced. “Carry” is an asset’s expected total return, positive or negative, assuming its price is unchanged.2 Regardless of the underlying asset, a carry strategy seeks returns from the net benefit or cost of holding that asset, in excess of the potential for price appreciation/depreciation.