Carry Trade Strategy

Investment Summary
The Carry Trade Strategy builds a diversified carry trade portfolio by investing equal dollar amounts in each of the 9 most liquid currencies (Australian Dollar (AUD), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Norwegian Krone (NOK), New Zealand Dollar (NZD), Swedish Krona (SEK)) on a monthly basis.

Momentum is implemented to further boost the carry trade strategy portfolio performance.

Every month you go long those strategies against the US dollar whose short-term returns are higher than their long-term returns, against selling those currencies whose short-term returns are lower than the long-term return.

To avoid market crisis, market risk indicators are used.

MacroVar offers 300+ Investment Strategies with higher returns, lower risk and losses than the Carry Trade Strategy

Investment Performance
Investment Return (?): 3.9% Volatility (?): 3.2% Sharpe Ratio: 1.25 Maximum Drawdown: -5.5%
Investment’s Fundamental Concept:
Carry trade: Carry trade means receiving returns from holding one asset against borrowing another asset.

Carry trade is borrowing in currencies (funding currency) with low interest rates to buy and hold currencies (target currency) with high interest rates. This is interest rate arbitrage between currency pairs.

The investment will be profitable as long as target currency does not weaken against funding currency too greatly to erase the interest rate differential.

Investment’s Logic:
Build a diversified carry trade portfolio by investing equal dollar amounts in each of the 9 most liquid currencies (Australian Dollar (AUD), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Norwegian Krone (NOK), New Zealand Dollar (NZD), Swedish Krona (SEK)) on a monthly basis.

Momentum is implemented to further boost the carry trade strategy portfolio performance.

Every month you go long those strategies against the US dollar whose 3-month returns are higher than their 1-year returns, against selling those currencies whose 3-month returns are lower than the 1-year return.

To avoid market crisis, market risk indicators are used.

Between 2001 and 2012 the average annualized return of the portfolio was 3.9% with a low volatility of 3.2% generating a sharpe ratio of 1.25.

FX Carry Trade Risk:

The significant risk of FX Carry Trade Strategies is that exchange rates become very volatile during market crisis. From August 2008 to January 2009, AUDJPY lost 43% and other trade carry pairs like NZDJPY and GBPJPY lost 42% and 39% respectively. Popular carry trades are also highly correlated with other risky assets like the S&P 500. From 2001 to 2013 AUDJPY had correlation of 0.60 with S&P 500. During the 2008 market crisis the correlation increased to 0.75.

Market Risk Indicators: Market Risk Indicators are implemented to filter calm market periods where significant risk losses are small and other periods where market risk is high. When the market is nervous implied volatility rates spike up and this the time to take risk off.

Other Investment Strategy Characteristics:
Investment Type: Statistical Arbitrage Investment Risk: 1/5 Very Low Backtest Range: 30-40 years Rebalancing period: Daily
Investment Strategy Markets:
  • Australian Dollar (AUD)
  • Canadian Dollar (CAD)
  • Euro (EUR)
  • Japanese Yen (JPY)
  • British Pound (GBP)
  • Swiss Franc (CHF)
  • Norwegian Krone (NOK)
  • New Zealand Dollar (NZD)
  • Swedish Krona (SEK)
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