The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis (BUSINESS BOOKS)

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But, as the authors point out, carry trading is not limited to rogue traders. Collecting steady premia is what an insurance company does. Banks, who borrow and lend to earn an interest rate spread, are also carry trading. But insurers and banks diversify across many customers, transforming a portfolio of risky bets into a benign balance sheet. In contrast, most carry trades in the financial markets are correlated in market crashes, so true diversification is hard to find. Leverage also forms an important part of the definition of Carry as defined by the authors. FX carry trades often yield a desultory sum, like the 2% a year currently available from the USD/EUR pair. This would need to be leveraged several times to get a reasonable return. Naturally, option selling is an inherently leveraged activity. As the authors rightly say, the use of leverage is a key characteristic of carry trades. A carry trader who uses no leverage can ride out any storm. But with high leverage, the slightest adverse price movement will wipe them out. Carry as trading strategy

He currently lives in Oakland, California with his wife Jody and their four children and has as a moderate-to-severe obsession with tennis.money-printing presses went into overdrive. A myriad of emergency funding windows were opened to enable cash to be injected into the financial system, and from virtually any and all directions. Sovereign borrowing and credit guarantees were issued left, right, and center. Direct public funding was placed into all the major American banks and many of the smaller ones” This, “unprecedented deployment of liquidity and direct involvement in markets played a critical role in reconnecting the wires of the market system and restoring trust (p. 48, El-Erian) The authors do not make this distinction sufficiently clear, defining carry as a trade with ‘short exposure to volatility’. This is correct for short volatility trading, but not for FX carry where only volatility in the wrong direction is problematic. But perhaps I am being too pedantic. Higher yielding currencies are usually emerging markets. These get hurt when risk levels are elevated, whilst lower yielding currencies are normally ‘safe havens’ like the US and Japan. At first glance an unhedged short volatility position has no effect on the market. But it is very likely that an unhedged trader has sold their options to a market maker, who will usually be delta hedged (unless they are young and callow). The market maker is long volatility, and hedges by selling as the market rises, and buying on dips. They will reduce the volatility of the market. Protect yourself from the next financial meltdown with this game-changing primer on financial markets, the economy - and the meteoric rise of carry. The significant rise of income inequality is impacting and changing political landscapes worldwide. Central banks, legislators, and thought leaders are struggling on deciphering all the causes of income inequality and to come up with solutions for this globally intensifying problem.

He is a co-author of The Rise of Carry (2020). He is also the author of the highly regarded Economics for Professional Investors (2nd edition 1998) along with many articles in newspapers and journals. His commentaries and analyses have been widely quoted.In 2002, he moved to California to co-found Algert Coldiron Investors, a quantitative equity specialist managing both hedge funds and long-only strategies. ACI was consistently ranked by alternative investment consultants as among the best equity market neutral managers globally.