Multi-asset factors
Carry
| Real return | Cash + 2% |
| Volatility | 6% |
| Correlation | High-ish, depending on implementation |
| Testfolio | FOXY (for FX), CCRV (for commodity), RSSY-IVV+CASHX (for multiasset) |
| Inflation | Nominal |
Carry means being long assets that are yielding more, ignoring price changes.
The most well-known form of carry is currency carry: short low-yielding currency (e.g. Japanese Yen) and invest it into a high-yielding currency (e.g. Mexican Peso). According to the theory of Uncovered Interest Parity this shouldn’t work, but in practice it does. The risk is that in times of turbulence the low-yielding asset is more of a safe haven and the high-yielding currency may deprecate.
Similarly carry in commodities works by going long or short futures based on future month contracts.
For fixed income, carry means playing the yield curve.
For equity, it means dividend investing.
Because of the lack of overall indices and the multitude of implementations it’s hard to put a number on this strategy. I have chosen to base the risk/return on the S&P Risk Premia FX Carry G10 Index.
Momentum
| Real return | Cash + 2% |
| Volatility | 6% |
| Correlation | 0 long-term, but -1 to 1 short term |
| Testfolio | DBMFX |
| Inflation | Nominal |