There’s a curious magic trick in finance: a return that appears when nothing happens. No news, no surprises, no change in price. Just carry—the part of a trade’s return that comes from standing still.

Currency traders have long known this sleight of hand. Borrow low-yielding yen, buy high-yielding Aussie dollars, collect the difference in interest income. Provided the exchange rate doesn’t move against you, it’s a nice consistent profit. Of course, sometimes it does move against you—like during a global panic—and the whole thing blows up. But until then, you look very clever.

What Koijen, Moskowitz, Pedersen, and Vrugt do in their paper Carry is ask a natural—but strangely under-asked—question: can you do this trick in everything? Not just FX, but equities, bonds, commodities, credit, and even options?

Spoiler: Yes. And not only can you—you probably should, because carry turns out to be a robust, mostly model-free, forward-looking predictor of returns. It’s also a quietly unifying force in the disjointed chaos of factor investing. Momentum, value, dividend yield, yield curve slope, basis—all those factors you know and love? Many of them are just different dialects of carry.

Carry is not a theory. It doesn’t require beliefs about the economy, discount rates, or marginal utility of consumption. It’s more primitive than that. Carry is simply the return you’d earn if the market went nowhere.

In practice:

• In currencies: the interest rate differential.

• In bonds: yield and roll-down.

• In commodities: the basis.

• In equities: expected dividends.

• In options: theta and the term structure of implied volatility.

This makes carry observable—a rare virtue in a field drowning in models and second moments.

Expected returns, on the other hand, are not observable. They’re dreams, spreadsheets, and tears. The authors decompose expected return as:

Expected Return = Carry + Expected Price Change

The cleanest test of asset pricing models is whether carry alone explains realized return. If it does, your model has some explaining to do.

Answer: yes. Consistently and pervasively.

The authors apply carry strategies across nine asset classes, going long high-carry assets and short low-carry ones. Every single one makes money. The average Sharpe ratio within asset classes is 0.8. A diversified global carry portfolio hits 1.2.

This is not a backtest of clever rules on one market with look-ahead bias and a broken rebalancing assumption. This is nine very different markets, over multiple decades, using a clean and uniform definition. That’s not robustness; that’s bullying.

Carry not only predicts returns—it often subsumes traditional predictors in regressions. In many cases, value, momentum, and other staples of the quant pantry have nothing left once carry is taken into account.

You almost feel sorry for the factor zoo keepers—now reduced to actual zookeepers.

Of course, this isn’t risk-free arbitrage. You earn the carry premium by exposing yourself to certain risks. To collect a risk premium, you have to take risk.

Carry strategies generally do badly during:

• Global recessions

• Liquidity crunches

• Volatility spikes

Carry is a quiet, powerful force. It doesn’t care about your valuation model or your macro view. It just asks: if prices don’t move, who gets paid?

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