Carry is the lubricant of investing. Carry, as we define it here, is the difference between what one can earn on an asset and what one pays to finance the asset purchase. When carry is negative, it costs more to finance an investment than the expected cashflow on that investment. Rationally no one should take on a negative carry investment for too long unless they are confident of a payoff later, because the negative carry will literally burn a hole through their wallet while they wait.
In a paper I coauthored a few years ago, we demonstrated that across a range of markets, the best strategy combines trading in the direction of the trend, and doing so when the carry is positive. The worst strategy is to fight the market; i.e. go against the trend, and pay carry to do so. This should not be very surprising, since anyone who has survived in the markets knows that it is always best to (1) not fight the market’s direction, (2) not pay too much to invest, and negative carry, fees and bid-offer spreads are all costs.
Support authors and subscribe to content
This is premium stuff. Subscribe to read the entire article.