Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios
Vol. 17, No. 4, 2019
Marco Aiolﬁ and Yesim Tokat-Acikel
Investors are increasingly showing interest in risk premia strategies across asset classes. Carry is one of the most studied premia. To successfully execute a risk premia strategy, it is important to have a detailed understanding of how individual premia returns are affected by macroeconomic conditions. The literature reports that carry strategies are commonly exposed to business cycle, liquidity, and volatility risks; however, evidence of direct links has never been clearly established. We build on this research by directly measuring the macroeconomic characteristics of carry factor portfolios, namely real economic growth and inﬂation exposures. By pairing methodologies commonly used to derive fundamental characteristics of equity portfolios, we are able to identify macro linkages that have not been previously made evident. Our holdings-based and factor-mimicking portfolio analyses provide insights into the behavior of carry strategies across various asset classes. This approach can help investors build multi-asset carry portfolios that are better aligned with their goals.