The Economist Covers Carry Trading

Not long ago the Economist ran a good article on the risks and rewards of carry trading. Here are a few of the highlights:

"In the foreign-exchange version of the carry trade, an investor receives an income by borrowing a low interest rate currency and owning a higher-yielding one. This produces a positive return most months, but the risk is that the high-rate currency will devalue, resulting in a heavy loss."

"Cynics have described these bets as 'picking up nickels in front of steamrollers'. [Great quote, huh?] A long series of small gains is punctuated by the occasional wipe-out. However, from the point of view of a hedge-fund manager, it is a perfectly rational approach."

The article also makes the point that trading against the interest-positive direction (or "anti-carry trading," as it could be called) will usually be a losing strategy, unless the market is clearly trending that way.

However, it concludes rather ominously by stating that: "Low volatility and the carry trade sow the seeds of their own destruction."

You can read the whole article at Economist.com:
"Instant returns: why investors have become addicted to the carry trade." Definitely worth a look, whether you're currently carry trading, are considering it, or just want to learn more about how it works.

Related topic:
Learning about carry trades