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Alternative Market Briefing

Research suggests new applications for carry strategies

Thursday, February 18, 2016

Bailey McCann, Opalesque New York:

New research from Campbell & Company suggests that there may be new applications for carry strategies which lead to strong risk adjusted returns for investors. While carry strategies are often linked with foreign exchange, this study illustrates the implementation of carry within four major asset classes: foreign exchange, fixed income, equity and commodity.

According to paper author Susan Roberts, the concepts involved with using a carry strategy can be implemented across a range of asset classes provided the holding period is aligned appropriately. If the strategy is used across asset classes, managers are able to mitigate the risk of adverse spot price movements.

Roberts argues that while the inherent risk to all carry strategies is that the asset price will change in an adverse way, eroding profit, the multi-asset approach to carry trading has tended to mitigate tail risk because of the very low historical correlation between carry returns across asset classes. Blending carry with directional strategies can also create a positive portfolio effect and bolster returns.

Roberts created The Hypothetical Global Carry Strategy to test her assumptions throughout the paper. She compared how the strategy would have performed from 1992-2015 and was able to find some evidence of low correlation between asset classes and a smoother return profile even during down years.

The full paper is available ......................

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