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Optimizing Carry Pickup in Real Money Portfolios

Pavan Wadhwa and Christian O’Donnell
The Journal of Portfolio Management Winter 2010, 36 (2) 73-79; DOI: https://doi.org/10.3905/JPM.2010.36.2.073
Pavan Wadhwa
is a managing director at J.P. Morgan Securities Ltd. in London, U.K.
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  • For correspondence: pavan.wadhwa@jpmorgan.com
Christian O’Donnell
is an associate at J.P. Morgan Securities Ltd. in London, U.K.
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  • For correspondence: christian.a.odonnell@jpmorgan.com
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Abstract

Earning carry to enhance portfolio performance is a core theme for many fixed-income portfolio managers. In this article, the authors analyze the historical performance of five different carry strategies—yield curve, credit curve, liquidity, FX, and volatility carry—in various currencies over the past six years and suggest ways to combine these strategies to earn optimal risk-adjusted returns in fixed-income portfolios by constructing an efficient frontier.The results of the authors’ research indicate that 1) earning liquidity or volatility carry is alone unlikely to significantly improve portfolio returns, 2) moving up the yield curve and down the credit curve are key sources of carry in fixed-income portfolios, 3) diversifying across carry strategies should significantly improve the average information ratio, and 4) diversifying across currencies within a carry strategy is unlikely to result in significantly reduced risk.

TOPICS: Fixed-income portfolio management, in portfolio management, analysis of individual factors/risk premia

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The Journal of Portfolio Management: 36 (2)
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Optimizing Carry Pickup in Real Money Portfolios
Pavan Wadhwa, Christian O’Donnell
The Journal of Portfolio Management Jan 2010, 36 (2) 73-79; DOI: 10.3905/JPM.2010.36.2.073

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Optimizing Carry Pickup in Real Money Portfolios
Pavan Wadhwa, Christian O’Donnell
The Journal of Portfolio Management Jan 2010, 36 (2) 73-79; DOI: 10.3905/JPM.2010.36.2.073
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