March 2, 2025. The market opens in a sea of red after news of a US attack on the Iranian regime. Treasuries flow in anticipation of inflationary supply shocks. Trend following strategies are in disarray. Tail strategies have not yet reacted. And yet, the carry, by all accounts, flies.
What is more interesting is that this strategy is not well known for its convex properties. In fact, the carry is more akin to a mean reversion play – it seeks to take advantage of convergence in price differences. So how did this convergent strategy end up taking advantage of one of the biggest geopolitical shocks in modern times?
In this post, I will review the properties of the carry factor highlighted in our recent YouTube video to answer the question: Why is transportation working so well? My hope is that by examining this question, investors will be better informed about how to build better portfolios and whether transportation should have a strategic piece of the portfolio pie.
If you want to check out our latest episode on the carry factor, be sure to check it out here:
Let’s begin.
Average return to play
The carry factor, in its simplest form, seeks to target higher-yielding assets. Simple enough. The fun part is translating this idea into the space of the future.
Because yields must be reflected in the futures curve, leveraged investors may want to go long in backwardation (contracts that trade below the spot price) and short in contango (contracts that trade above the spot price). By doing so, investors seek to earn the difference between the spot and futures prices in the hope that the two will converge.
While there are repetitions of this idea (see our Video on YouTube to see one), shipping is by its nature the search to buy discounts and sell premiums. Going into March, and depending on the program, the carry was mostly short equities, long the dollar and long energy; one of the best combinations if betting on an inflationary shock stemming from geopolitical tensions. Specifically, crude oil had been trading sideways since 2022 and the market had a long-side discount.
In general, it is unclear whether the carry had a price in a risk environment, or whether the hottest performers of 2025 (stocks, gold) had a price attached and the worst performers (dollar, oil) had a discount attached – or if they are both the same thing.
One thing is certain: Mean reversion can look attractive after bullish reversals.
Whether due to fate or structure, the current performance of transportation reminds us once again of the importance of portfolio diversification.
Width matters
There are no two ways about it: if you wanted diversification during the Iran conflict, you had to look beyond stocks and bonds. The failing point of traditional portfolios is that they place the burden of diversification on bonds and largely ignore inflation risk. Smart investors should target all four major asset classes (stocks, bonds, commodities and currencies) and various structural strategies.
Carry’s epic run is another reminder that diversification isn’t just about the number of stocks you hold.
Diversification is positional, not predictive
“So did the Tsar predict the Iranian conflict? Personally, it’s hard for me to see how it would – or could.
“So did you have any luck?” Maybe! But I think the description of luck to make the run takes too much credit away from diversification. Did the trend follow in 2022? Was tail protection lucky in 2020?
Diversification is simply an admission that you don’t know what’s going to happen next.
Little did the Carry investors know what was about to happen. They knew that the strategy had suffered for a long time, but that the diversification of assets and strategies would eventually pay off. In the end, it was the disciplined who reaped the rewards.
Is it too late?
Whenever an asset rallies, investors fear “stacking up,” worrying that the strategy’s run is already over. Here’s the truth: we just don’t know if the rally is over. Shipping can be cut in half or double.
And so, if investors want to target the carry factor, they have to look inward and ask themselves if they’re chasing performance or if they have real conviction in the carry factor. Sometimes the emotional interference of the wallet can seem extremely rational.
Perhaps the question to ask is not “Is it too late to invest in transportation?” but “Now that I know about the power of diversification beyond stocks and bonds, How can I better diversify my portfolio?”
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Important discoveries
For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Some information is considered reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become out of date or be replaced without notice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates, or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (in the last direction).
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