01 Apr Learning From PIMCO’s “Carry and Trend in Lots of Places”
Combining positive absolute momentum and positive carry produces significant positive risk adjusted returns across major asset classes and across different interest rate cycles.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
We are familiar with Absolute Momentum but we will proceed to define Carry.
Carry is defined as expected return on an asset assuming that market conditions, including its price, stay the same.
Conceptually, we can think of carry as a position that harvests risk premiums, and thus, performs best when prices don’t move much, whereas trend-following is a long-tail option-replicating strategy, which benefits when prices move as a consequence of fat-tail events such as those experienced during the financial crisis. Thus, combining these two strategies should intuitively result in better portfolio outcomes in a broad set of states.
PIMCO showed in “exhibit 6” of the paper (reproduced below) that when absolute momentum and carry are both positive, the risk-adjusted returns are significantly better across multiple asset classes and different interest rate cycles.
Research Paper: Carry and Trend in Lots of Places
Authors: Vineer Bhansali, Josh Davis, Matt Dorsten, Graham Rennison