Don’t Get Carried Away: Uncovering Macro Characteristics In Carry Portfolios

Vol. 17, No. 4, 2019

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.