Swedroe: Carry Factor Spans Assets

August 30, 2017

Recent Research

Nick Baltas contributes to the literature on carry with his May 2017 paper, “Optimising Cross-Asset Carry.” The paper focuses on the returns of a globally diversified, multi-asset class carry strategy.

The data sample covers January 1990 through January 2016 and included 52 assets: 20 commodities (constituents of the Bloomberg Commodity Index excluding precious metals, e.g., gold and silver), eight 10-year government bonds, nine FX rates (G10 pairs against the U.S. dollar) and 15 equity country indexes.

He specifically used roll-adjusted front futures contracts to determine returns. In constructing carry portfolios, Baltas explored three different weighting schemes:

  • Cross-sectional carry: The relative strength of the carry of each asset compared to all other assets in the same asset class is used to construct a balanced long/short portfolio in terms of notional exposure.
  • Times-series/absolute carry: The sign of the carry of each asset is used to determine the type of position (long or short) to construct a portfolio with explicit directional tilts; net long when the majority of assets are in backwardation and net short when in contango.
  • Optimized (OPT) carry: Both the relative strength and the sign of the carry are used to determine the type of position (long or short) as well as the gross exposure for each asset. Most importantly, the optimized carry portfolio additionally accounts for the covariance structure between assets and asset classes in a way that risk allocation is optimized.

Following is a summary of Baltas’ findings: 

  • The correlations of the four carry strategies (commodities, bonds, currencies and equities) are all low to negative, providing strong diversification benefits while also minimizing the tail (or crash) risk generally associated with FX carry.
  • While FX carry exhibits negative skewness, equity market carry exhibits positive skewness.
  • Diversified carry strategies exhibit very low betas against various passive, broad market indexes (MSCI World Index, Bloomberg Commodity Index, JPMorgan Aggregate Bond Index and Trade-Weighted USD).
  • Carry strategies delivered statistically strong (at the 1% level of confidence) average excess returns (ranging from 5.9% to 9.1% at a targeted volatility of 7%) and generated high Sharpe ratios (ranging from 0.8 to 1.0).


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