Carry On: Demystifying the Carry Trade with Rodrigo Gordillo & Adam Butler of ReSolve

We’re back! Today’s podcast features The Derivative show stoppers Rodrigo Gordillo @RodGordilloP and Adam Butler @GestaltU of ReSolve Asset Management @InvestReSolve discussing the carry trade and its applications in investment strategies. They begin by explaining what the carry trade is and discussing common misconceptions around it.

They then dive into different types of carry that can be found in various asset classes like bonds, commodities, currencies, and equities. The guests discuss how carry strategies can be implemented, either on their own or as part of a larger multi-strategy portfolio. They also compare carry to trend following strategies and debate the pros and cons of each approach. The podcast explores how a diversified carry factor can provide returns with reduced risk when combined with other strategies. Rodrigo and Adam explain how carry fits into their risk parity framework and can be used to tilt allocations. They also discuss integrating carry and trend signals to lower trading costs. Gear up to receive that spoonful of sugar that indeed will make the medicine go down with tons of insight and access to some great content as an investment factor and perspectives on its role in multi-asset portfolios.




From the episode:

The Rise of Carry(Book)

The Carry Trade post

Get Stacked Podcast

ReSolve Riffs Podcast

Setting the Risk Parity Record Straight – The Derivative episode

Researching the Risks of return stacking with Corey Hoffstein & Rodrigo Gordillo – The Derivative episode

Asset Allocation, AI, and the Alpha process with Resolve – The Derivative episode


Check out the complete Transcript from this week’s podcast below:

Carry On: Demystifying the Carry Trade with Rodrigo Gordillo & Adam Butler of ReSolve

Jeff Malec  00:06

Welcome to the derivative by RCM alternatives, where we dive into what makes alternative investments. Go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Welcome back. That was an unexpected few weeks off. Sorry about that. I had some covid like something pop up, then a guest couldn’t make it, then some summer schedules got in the way. But we’re back with a deep dive of a pod here talking about the infamous carry trade with our old friends and former podcast Rodrigo Gordillo and Adam Butler of ReSolve. So what is the carry trade? Exactly, the currency trade that can blow up a hedge fund, or the non correlated trade that can act as a big diversifier for multi strat funds. We’re here to find out. Send it. This episode is brought to you by RCMs, outsource trading desk. You know, where futures carry trades like we talked about in this episode, are executed. That’s right, right there at RCMs, 24 6, outsource trade desk operations. Check it out at RCM, 24 and now back to the show you. All right, welcome guys. We’re here with Rodrigo Gordillo, which after 10 years or so I can finally pronounce correctly. You can go back and listen to some old podcasts where I completely butcher it and Adam Butler of resolve, how are you guys?


Adam Butler  01:39

We are good, man.


Jeff Malec  01:42

Yeah, Adam is much easier to pronounce. Yeah, I’m sorry I missed you here in Chicago, but we’ve been running around like crazy ourselves, lots of baseball and softball and golf tournaments, which is all good. So you guys did this recent white paper on the carry trade, which you want to get into. But let’s start with when I hear carry trade, we just did a blog post. We’ll put a link to it in the show notes of like in 2008 there was a guy who blew up from the carry trade, and he had a yacht named Carrie positive carry so I think a lot of people, when they think of the carry trade, think of this trade that can blow up. So maybe start with, like how traditional carry works, and then we can get into the nitty gritty of what your white paper is. Who wants to dive on the grenade first?


Adam Butler  02:37

So I’ll chime in. So I think the traditionally people have, but they hear the word carry. They think of a an investment where you’ve got steady, relatively high returns, or excess returns relative to to cash or T bills with either zero or very low levels of volatility, sort of picking up nickels in front of a steamroller. I think people are familiar with that metaphor. And every now and then there’s a risk escalation, and the trade goes wildly against you, and you end up losing a pile of the returns that you earned along the way. Right? So volatility selling would be a version of that we were chatting before the show for a very long time, there was the MRS Watanabe trade, where you had all the Japanese housewives borrowing in yen, investing up the curve into Euros with higher rates, or into dollars with higher rates, or emerging markets with even higher rates. And those that tended to pay off quite nicely, until there was some sort of risk event which caused a flight back into the yen, or flight into the into the dollar or something, and and the trade would blow up. So you know, what’s different about the approach that that we’ve described in the in the paper, is that we’re taking sort of a wide variety of these types of risks, like, if you think about it, equity risk is is carry. You are investing in an equity index. Most of the time it generates nice positive returns. And every now and then, there’s a risk event, and you lose 30 to 50% of your wealth in a matter of a few months, right? And we’re investing in all of these different markets, equities, bonds, currencies, commodities, each of which. Has. You know, each market has its own idiosyncratic risk of something happening within that market. Think of a specific incident within a certain equity market because of political turmoil or some other geographic risk, or within the energy complex, or specifically in Brent crude or within a specific grain, et cetera. They all have their own kind of carry risk where they could have a large spike. But when you blend all of these markets across these different sectors together, the spikes tend to diversify one another. So it’s not as if the strategy doesn’t have any volatility. You know, it does go up and down, and it does have drawdowns, but because of the diversity within the portfolio and the fact that you’ve got long and short positions conditioned on whether the market is in a positive carry state or expected carry state or a negative expected carry state, given the shape of the futures term structure or some spot analog those spikes tend to tend to balance out. And over time, you get this nice, smooth growth line.


Jeff Malec  06:18

You jump to the end in the beginning, but let’s rod if you could come back up two levels, I


Rodrigo Gordillo  06:25

think I can add some interesting color to that idea of Carrie as well, because I just had a conversation yesterday with an advisor that he pointed to a book by what was It called the rise of Carrie, the dangerous consequence? Kevin. Kevin Calderon, yeah. So he was saying, look, there’s a clear and cold iron. Cold iron, yeah, there’s a clear depiction of what Carrie is and the dangers of Carrie. And he was curious to know what our thoughts were on that, and so I think it was, it’s important to disaggregate what they mean in that book by Carrie, what a lot of people are thinking carry is, and what a diversified, long, short, managed futures carry strategy is, right? The idea of carry is what you get paid if the price doesn’t change. So the idea of carrying equities as your dividend is what you’re going to get paid at the end of the year, assuming the price doesn’t change, is your return. But of course, your actual return is a combination of, did the price of the asset appreciate plus that dividend, right? And so that’ll vary over time, but your selection mechanism for a diversified carry strategy is based on, is the yield higher or lower relative to other things, or is the year higher lower relative to itself? Or is it positive or negative? There’s a wide variety of ways that we describe in the paper, which I gotta say, Adam and Andrew Butler both did an immense amount of work on this for months, and they did a great job on it. So if, aside from the podcast, if nobody’s got a chance to download it, I would. But they go into detail of the different types of carry, going back to the perception of what carry is and the dangers of carry is, the basic nuance here on this paper, is the fact that, on this book, is that they describe carry as borrowing very cheaply to then invest in higher yielding assets, and when that, when that carry changes, you’re going to get blown up. So that’s accurate, right? Yeah.


Jeff Malec  08:29

And I think, right, I want to come back Adam, you kind of equated it to just what I would just call risk, right? Of like, hey, there’s risk in this. We can hold that risk and get paid. So that’s true, but also a little more nuanced than right? I think the book and the perception out there is Carrie, the difference between carry and the carry trade. So the carry trade was borrowing cheaply, investing richly, right? And I’m curious you’re saying, like, actual Japanese housewives would do that, Greg, because you had to have a Japanese long


Adam Butler  08:59

term trade when, you know, call it 1015, years after the peak in Japanese equities and and the Bank of Japan had kept rates basically at zero all along the curve, and you could borrow along the curve for next to nothing in yen, and then invested up the curve in, you know, Aussie dollars or euros or


Jeff Malec  09:20

But hedge funds and lots of non Japanese were doing that as well. Oh yeah, yeah, for sure, yeah, but they had a harder time getting access to the in country than the actual Japanese did,



yeah. And


Rodrigo Gordillo  09:35

also that’s that carry trade, that that the Japanese yen trade. A lot of people think when you say carry, they often just think about currency carry. And currency carry can be seen as a very singular trade, because even though you’re trading many different securities, most of the time they’re thinking us and somebody, somebody else’s currency cross right versus the US, sometimes us being the reserve. Currency when it all of a sudden changes, and there’s a run to safety, every one of those crosses will get burned at the same time, right? So this is really this going to happen in any type of carry trade, but are the same drivers affecting all carry trades, across bonds, across equities, across commodities and currencies? And the answer is no, that’s the key behind all of this, in terms of being a successful strategy, is you want to make sure that you’re diversifying all the risk across different types of carry trades in different types of markets.


Jeff Malec  10:37

How do you view the difference between trading, right? If I just own Swiss francs against the dollar, what’s the difference between that and borrowing the dollar to own the Swiss franc? Essentially, nothing, right? There’s like a little nuance there between actually just trading the currencies and doing the quote, unquote carry trade.


Adam Butler  10:58

Yeah. I mean, you’re looking for for for changes in the carry, right? So there are periods when, like, there’s carry is kind of a fancy word for things that actually people are very well aware of, right? Yeah, Rodrigo mentioned that equity carry is the dividend yield, right, right,


Jeff Malec  11:17

which no RA in the in history of mankind has ever called the dividend Carry. Carry


Adam Butler  11:21

exactly, but that’s what it is in bonds. Carry is either through a steep yield curve right where it you typically have a higher required return to lend your money for 10 years than you do for two years or three months. And so a positive, sloping yield curve produces, you know, bond, carry, duration, carry, you can also have carry on, and we’re talking they’re


Jeff Malec  11:45

two years at 2% five years at 5% 10 years at 10% in an extreme example, but Right? I’ll borrow two years and buy 10 years.


Adam Butler  11:55

Yeah, exactly. Um, and there’s also credit carry, right? Which is, which is really what Evan cold iron and and his the other authors focused on in the rise of carry is the rise of credit markets and securitization markets and and rehypothecation and leverage on leverage, on leverage. You’ve got this kind of credit carry, right? So triple B bonds are going to typically have a higher yield than triple A bonds, so or Treasury bonds. So you can swap treasury yields for credit yields and earn a, earn a positive carry on that right in commodities, there’s a carry from that arises from storage costs, or for the desire of producers to hedge their forward production just to stabilize their earnings flow, or to make it cheaper for them to raise financing to go and develop a new mine, that sort of thing, right? So all of these different asset classes have carry they’re intuitive and recognizable if we don’t call it carry, if we call it something that’s specific to that asset class, but really they’re just all of these different sources of return in compensation for risk.


Jeff Malec  13:15

Is it easier? It’s somewhat easier to me to flip it and think of it as the cost to hold the thing, right? It’s like the interest rate. It’s the rent, so to speak. So either you’re going to pay that rent to get into this asset class or receive that rent to be essentially loaning out the asset class. Yeah, that’s


Adam Butler  13:33

right. It’s that’s a really good point, actually, because the idea here is you need to borrow something to invest in something else. So you’re always sort of borrow. In the simple case, you’re always sort of borrowing cash to invest in something that you think has a higher yield than cash over the investment horizon, or to go to go short, to own cash and sort of borrow the other security to own cash because you think that cash is going to have a higher return than the other thing that you’re shorting over that investment horizon. Yeah,


Rodrigo Gordillo  14:06

I think that’s an example of that would be cash versus the 30 year to when the yields inverted, right when the yield curve is inverted, that would it’s better to go long cash and short the 30 year to capture that carry


Jeff Malec  14:19

exactly and the other what’s the example? I can’t remember who it was, Grosvenor, or one of those commodity firms that didn’t unload the oil tankers, right? Because the carry was positive. So they said, Oh, we’re just going to keep them in the Gulf of Mexico filled with oil until the price of oil comes back. And because they’re looking at the curve, and three months out, it was $40 I’m using extreme examples. In near term, it was $20 like, just keep it in the and it cost $1 a month to keep it in the in the tanker. Why not keep it in the tanker and roll it occur? And I think what also breaks people’s brains is these hedge funds have billions of dollars. Mm. Why do they need to borrow anything, right? Like, that’s what is a little nuance there, of like, right? You just put it at them. They’re borrowing X to invest in Y. Why did, why does a well healed investor, why does a hedge fund, why is a pension, why do they need to borrow anything? Why can’t they just invest in it? Yeah,


Adam Butler  15:15

I mean, so borrowing is sort of used a bit technically here, right? Like, what, all of this is expressed through, typically, through futures markets. Certainly, the way that we describe it in the paper is expressed through futures markets. So when you’re investing in the futures market, you’re effectively borrowing to get a leveraged exposure to the underlying market that you’re buying a position in right? So you may only have to put, you know, $5 down to get $100 worth of exposure in the s, p, right? You’re borrowing the other $95 to get to get that exposure and and so, you know, but that borrowing is not for free. You’re paying a funding rate in order to borrow that money that is implicit in the cost of the future. And so you’re you know, you want to invest in futures where the expected difference between the implied carry on that future exceeds the funding rate, which is typically cash plus a little bit. But, yeah, the great thing about futures is that the borrowing rate is set by the participants with the lowest borrowing rate globally. So it’s typically set by, you know, interbank markets, for example, who are implementing sophisticated hedges on massive balance sheets with access to, typically, liquidity directly from the central banks. So it’s, you know, the spread to the Treasury rate is, is very small, typically, yeah, if you the cheapest possible financing,


Jeff Malec  16:59

right, easy way to run that for someone at home, why charts or similar. Look at the SPY versus the S, P futures, right? One year return, and it’s going to trail by about the T bill rate.


Rodrigo Gordillo  17:11

Yeah. T bill plus or minus 30 basis points,


Jeff Malec  17:15

yeah. So rough heuristic is, okay, I’m and the little nuance there is, they’re not doing that because they don’t have the money. They can use the money more wisely elsewhere, right? So why not borrow at t bill rates? If I can earn 7% I’m earning that from a 5% T bill rate to 7% I can earn that 2% by quote, unquote, borrowing. It’s not that I need to, it’s that it makes more mathematical sense.





Jeff Malec  17:42

So I love it. So we did we cover all three. So there’s the carrying equities is dividend yield. The carrying bonds is the yield plus the roll down. What do you mean by the roll down?


Adam Butler  17:54

It’s just the the difference between what you’d get on a 10 year bond versus a nine year bond over over a one year period, as an example,


Jeff Malec  18:04

the commodities that gets complex with all the Commodity Futures pricing, but essentially all the costs of holding that commodity have to get worked into the futures price. So the storage, the transportation


Adam Butler  18:17

cost, is the insurance. Like commodities, I think actually are the most straightforward. Well, they’re just as straightforward as the other asset classes. And one of the things that people don’t immediately Intuit about commodity carry is that it exists because it creates a win win situation between the commodity producers and the speculators. So the commodity producers want to sell their production forward, like I mentioned, because it locks in a fixed price for some meaningful portion of their future production. And if they want to go to the market and get debt or equity financing for new capex, then they’re able to get that at a lower rate. Why do they get a lower rate? Because the earnings from those from from the what is produced from their mines or from their farms, etc, are mostly locked in. So you’ve got much more stable expected cash flows for the corporation, the producer those stable cash flows lower the cost of financing. That’s a win for the corporation, and the corporation is more than willing to pay the insurance, you know, the fact that they may take a small loss in expectation on selling their production forward, because they’re getting such a payback on their lower financing rate, and on the other side, the speculators who are investing in these carry trades are harvesting those insurance premiums from the producers.


Jeff Malec  19:51

And to put that in plain language, right? I’m a we’ll say I’m a human farmer, not a corporate farmer, but I’m a farmer. I. Going to the bank for a loan. He’s like, Well, who knows what the crop’s going to do next year? I don’t feel comfortable giving you this loan. It’s going to be 15% or something, versus now. He’s like, No, I’ve already pre sold everything that gets grown, no matter where the price of corn grows, I’ve it’s at $4 an acre, which equates to $4 million from my farm. So you should lend me that $2 million at something much less than 15% 7% or something. So you’re saying that that spread between what I could do with the heads versus what I can’t do with the hedges built into that futures price, you got it all right, so that’s all these different pieces of carry. Most people, as we said, think of it in currency terms. I don’t know why that is. Maybe those were just the most famous blow ups with but let’s touch back on like you even think of selling volatility as carry right, which I know that’s even rarer than people thinking of dividends. Is Carrie, in my opinion, like that seems like a totally separate thing of like, No, we’re selling vol um, we’re collecting this rent. We’re collecting those pennies in front of the steam train, as you said. But, yeah, I don’t think of that as Carrie, necessarily, but you’re saying, Yeah, you’re getting that roll down, you’re getting that yield


Rodrigo Gordillo  21:22

futures in the futures world, it’s fairly simple, right? We talked about Kerry B, and I go to the bank, I borrow, I buy this other asset, I go long or short something else. There’s a series of steps. When you look at a futures market for a single asset, you will find that the price of today’s price for oil will be different than next month’s and the month after that, and futures contracts give us different pricing for all the reasons that we’ve already described across time. And so that’s all we need to look at to give us an indication of what is the quote, unquote carry of something if you talk about short volatility, what you’re looking at is the term structure of the VIX contract, and that one generally is upward slope, and it’s in contango, right? And so what, when people think about these ETFs that are short volatility, all those ETFs are doing is they’re buying the further month out higher priced, they’re shorting the future contract as it rolls down. And they’re, they’re going to continuing to capture that, right? So that is a carry, that is a short volatility carry, and, sorry, is it? Yeah, it’s shorting volatility.


Adam Butler  22:39

Let’s give an example, right? That helps to crystallize it. Imagine that spot ball is 15. We’re a month out on a on a vix futures contract. The one month vix future is trading at 20, right? So over the next month we’re expecting, you know, if the price of the if nothing happened, we’re expecting that that thing that you shorted for $20 to fall to $15 to match at expiry or at maturity, the the spot VIX, and so you’re sort of betting on gathering this $5 of carry over that whatever 21 trading day period,



right? You’re the implied bet. There’s nothing happens in those 21 days. Exactly.


Rodrigo Gordillo  23:30

Implied bet is that that spot stays the same. The the implied bet is that that one month out contract it we expect the price to depreciate, right? So it is a we are observing. We don’t care about managed futures. Is known to be very popular in the trend following space. The selection mechanism for trend followers is to see a series of changes in prices over time. And if it has had a positive momentum, you want to go long. If it has negative trends and momentum you go short. The selection mechanism for carry is to is to observe the difference in price between one contract and another contract in the future or, and we’ll talk about this relative carries, right? So that differential, that that carry amount, is it higher with European equities versus US equities versus Canadian equities? And maybe we can rank them based on that, and we’re selecting to hold these assets long or short based on carry, but we are expecting a price movement to go in our favor as as we get closer and closer to spot,



so you could have success on both sides of earning the carry and the price movement


Rodrigo Gordillo  24:46

from the perspective of futures contracts. The only thing we’re really at the end of the day seeing is a change in price. Right? We’re seeing, yeah, there is no that December, December maturity contract is going to. Gravitate lower towards spot. If we assume that spot is what we want to get to, there


Adam Butler  25:04

may be a price in funding rate as well, but that would be reflected in the price of the price,


Rodrigo Gordillo  25:09

right? So we’re talking about carry as you know, theoretically, as I said, I buy a piece of property, the property cost X amount. I’m getting rent, and I’m going to extract those, those rent yields might also have a mortgage payment, minus the cost of, like, upkeeping the property in the mortgage right, and you get the differential. So that’s kind of like getting an idea of how to think about carry the implementation from as futures trading perspective is we’re literally, instead of caring about how price has moved in the past, like we do for trend following, what we care about is just is defining and ranking and choosing solely based on that, that carry differential right, that just measuring spot versus future contract, what’s that amount? Is it three bucks? Okay, that we tally all those up across many different futures contracts, and then we can have a series of selection mechanisms for what what we want to go along


Adam Butler  26:04

well, yeah, here’s a good example, right? Imagine, for for illustrative purposes, that front month WTI crude is trading at $50 and back month crude is trading at $50 too, right? So currently there’s no carry. Now the price moves over the next month. The price moves from 50 to $60 the front month and the back month is also $60 right? Well, you would say, well, that is has exhibited positive one month momentum over that period, but the carry hasn’t changed.


Jeff Malec  26:46

Zero. I want to take two steps back out and talk about, we kind of jumped right into the carry. But you guys view this in a holistic sense, right? This is part of the bigger portfolio, a compliment to trend, a compliment to all the other pieces of your overall portfolio. Talk for a minute about that, and we’ll dive back in.


Adam Butler  27:06

Originally, the thought about carry was it sort of emerged from a deep understanding of the concept of global risk parity, right? So global risk parity says, in a risk efficient market, you want to hold as many different sources of risk premia as possible, and hold them so that their risks are are generally equalized. So for example, if I’ve got equities and short term bonds in a portfolio. Well, if I don’t change the weight, if I hold them 5050, then most of the risk in a portfolio is coming from equities, because equities have much more risk to bonds used to. So I want to hold more bonds than equities until equities and bonds are giving me the same amount of risk, because at the same level of risk, I expect them both to give me the same the same return. All right, so anyway, you want to interrupt I think,


Jeff Malec  28:09

no, no, I



was, I was throwing out a snide comment that bonds used to be less risky than than stocks. Yeah, right,


Adam Butler  28:16

right. Now, the idea is to own all of these different markets, a bunch of different global equity markets, a bunch of major global bond market indices, and then a wide variety of commodities to hedge against spikes in energy inflation or metals inflation or food inflation or what have you you want to hold this massive diversified portfolio of risk premia, and by doing that, you’re earning all of the risk with all of the returns while minimizing the risk via diversification, right? But the wrinkle in that concept is that the risk premia for bonds is not always positive. The risk premia for commodities is not always positive. The risk premia for equities is not always positive, and so and for currencies, it’s not always positive. Which direction you’re going to earn the premium in. Do I want to be short dollars, long euros or short euros, long dollars, right? So what Kerry does is it says, Well, I’m going to have a global risk parity portfolio, but it’s going to be in the direction of the current carry. So if, if bonds currently have a negatively sloping yield curve, well I’m going to be shorter short the longer term bonds, rather than being long the longer term bonds, because I currently expect longer term bonds to have a lower return per unit of risk than shorter term bonds, right? If crude oil is in contango, where the distant futures are at a higher price than the near term future. Futures. If I’m going to invest in the in the distant futures, I’m going to expect them to roll down, to have a negative return. So I actually want to be short those crude oil futures. I don’t want to be long those crude oil futures, right? So we’re taking all the great benefits of global risk parity, and we’re saying, but when those risk premia are negative, I want to be short. I still want to maximize diversification across all these different markets and your geographies and asset classes, but I want to always be in the current direction the carry is facing. So


Rodrigo Gordillo  30:36

I’ll because, I’ll just add to that. Because the biggest objection over the years. And you know, Jeff, we’ve spoken in your podcast many times about our love for risk parity. Risk parity is the best portfolio for preparation, rather than prediction, right? It’s this idea that it’s really tough to predict the future price movements of things, and so I’m not even going to try. That’s what risk parity says. Risk parity says, I’m not going to going to try to predict anything. I just, I just given economic reasoning. I think that over my full lifetime, if I set it and forget it, bonds will have a positive risk premium by taking, you know, duration risk, that equities will have an equity risk premium over time, and that commodities will have a roll down yield. And I’m going to add the I’m going to put those together. Those together in equal risk. And Bob’s your uncle, you’re done, you’re set. All you have to do is rebalance once a year. There is no active management. And what people have always had a tough time wrapping their mind around is, but especially three years ago, was Wait, you’re you’re overweighting midterm bonds right now, when yielders out of your mind and risk parity says which they were, right, I don’t know. I’m not. I don’t even look, yeah, and what the possible return is, I just, I just, if that does happen, commodities should offset that period of loss, and that’s why it’s there, right? It’s, it’s got three pistons, and we’re happy now that was designed. That concept was designed by Harry Brown, and then, you know, Ray Dalio made it popular as a way to when I die and I don’t trust anybody, how do I create the simplest portfolio, set it and forget it and be confident that I’ll have reasonable returns for my family. The difference here is that we said to ourselves, okay, we got the respirator, but we do have the ability to actively manage. We do have an ability to tilt based on something, and it is clear that if the five year bond is providing me a lower yield than than cash, that we should probably remove the shorting constraint and short that thing and but maintain the ability to equalize risk across the securities that were both long and short. That is the major leap for us. I was when we first started thinking about Kerry. We thought about it from a risk parity maximally diversified lens, and then removing certain constraints to allow us to be active managers in that space. And it turns out that it is an incredibly robust approach to improving, or, you know, migrating from risk parity, naive risk parity to a carry approach.


Jeff Malec  33:16

And what I’ve seen from my seat is a lot of trend followers over the years would go long crude. In that example, Adam gave in, like, okay, the market went up, but they lost money because they kept paying the roll down because so eventually they’re like, why someone stood up in a meeting? Right? Like, Hey, why do we keep paying this carry? Maybe we shouldn’t go right? I probably the first step was, hey, maybe we should go along the back months or or do something different, instead of just rolling into this expensive roll yield. Maybe we should touch on what roll yield is. But right? Do you think that was? People are coming up from that way too, right? Because lots of man’s futures programs have had carry for years and years, a decade plus, I would say, right? Of like they figured out, okay, this is kind of complimentary. Let’s add it to the portfolio. We’re already trading these markets. We’re already looking at what the curve looks like in all these markets. So I don’t know if there was a question in there, but you’re both. You’re


Rodrigo Gordillo  34:12

asking is, you know why the trend followers not originally use carry then why do trend followers decide, maybe identifying how bad Carrie is if we’re going to go along this thing, or negative carriers, if we’re going to go along this thing, maybe that’s useful. And then why? Many people were like, hold on a second. I don’t pay you to do that, right? Yeah, I don’t like Carrie because it doesn’t give me the thing that I want. And we can talk about what the thing that people they want from trend that carry doesn’t necessarily offer. So I think your question is, you know, how does carry fit into the trend following equation, and why is it controversial? A controversial premium that may not be important


Jeff Malec  34:54

for sure, there’s a delineation of the guys who have to defend their carry allocation and their trend versus. Those sort No, I’m pure trend. Don’t worry about it. We look at that just in how we put on our positions or whatnot. Well, there’s a few


Adam Butler  35:06

different ways to cut it right, like DFA, the famous, you know, multi 100 billion dollar asset manager cult, has decided that they don’t believe sounds



like you were just hanging out with Corey for a few, a few. Yeah,


Adam Butler  35:26

they, you know, they made it clear a long time ago, they don’t believe in momentum, but they won’t take a value trade. If a stock they won’t be they will rotate into a value stock when they rebalance if that value stock has negative momentum, right? So trading filter, as opposed to, you know, another strategy that they’ve added, but they’ve still sort of quasi acknowledge the merit of the signal, right? My wife sneaks vegetables like spinach into mac and cheese for the kids, because she knows it’s it’s how it’s good for them, right? And I think over the last decade or so, a lot of managed futures managers have kind of snuck Carrie in by various means, because, you know, they’ve recognized that this is an extremely strong premium that they would rather not be sure. They’d rather be aligned with than than run against on occasion.


Jeff Malec  36:30

Yeah, and that’s a good segue. Like, I think in the beginning maybe some guys are like, hey, when trend followings in a flat to slightly down period, maybe it’s down 5% a year for three years on average, we lose a lot of investors during that time. Maybe we should sell the VIX, or do the yen carry trade and earn that 8% a year. So now we were flat in those years instead, I think that’s the worst look, right, of like, Hey, we’re just going to add this piece that gives us a positive 7% and if things blow up, our trend should make money when, when everything goes down, I think that’s


Adam Butler  37:03

a traditional take, right, that adding carry means you’re selling ball, or you’re, you know, you’re engaging in emerging market currency carry or or something that has very clear correlation with cyclical risk factors that they tend to blow up when equities are also having a drawdown. So those are anti complementary to portfolios.


Jeff Malec  37:31

And so you guys are saying, Hey, we have a better method. Is,


Adam Butler  37:35

well, it’s just, if you use all of the different markets that are available, or as many as you can access with sufficient liquidity,



which, what are we talking 80? Well, it


Adam Butler  37:46

depends on the size of the institution, honestly. But I mean, the paper that we wrote used 2025, I think, okay. But if you, if you include all these different markets and all these different asset classes and all these different geographies, then the carry strategy doesn’t have any kind of blow up risk that doesn’t have that character that everybody seems to perceive that carry exhibits because they understand it as being short ball, or, you know, emerging market carry or something like that, like it’s, it’s just, if you, if you’re, if you’re using leverage carry in one concentrated area of the market, well, yeah, that’s going to have times when it’s going to have a really rough go, and it may be correlated with when the other parts of your portfolio are also having a really tough go. So it actually, it really hurts, yeah, to hurt when it hurts in your other part of your portfolio, but when you take it all together, it does not have


Rodrigo Gordillo  38:51

that. So I’ll add to this Adam, because in that is true, everything that you said is true. And I think that’s a perception that it’s if you’re going if you’re shorting the VIX to add some cushioning while trend isn’t working, what’ll have to happen is that trade will get hurt. Trend will do well in an environment in a big, abrupt shock, there’ll be a hurdle for it to pass through, where trend has to outperform the losses, and that’s kind of like the whole idea and mismatch, obviously, yeah, but people buy, I think that the the reason that that some allocators were upset by this intrusion of carry is the they want that maximum protection when they need it. Now, another way to think about this in the way that Adam described a well diversified carry is that actually Carrie seems from our research, and we did a webinar on this recently that showed that it seems to be completely agnostic to market regime, whether it’s high inflation, low inflation, high growth, low growth, it tends to chug along just. Fine. In fact, in any given market scenario, let’s say covid blow up, the likelihood of a well diversified carry strategy to make money in any given day or lose money in a given day is around 50% like it’s, it’s, it’s not correlated to a particular event. Trend clearly will be negatively correlated if there is an abrupt series of market moves that define trends widely, right? You will, you can count on trend, roughly speaking, during market moves where it’s risk on, risk off for a few months, you’re going to make some money in trend. You can’t say that about a diversified carry strategy, right? And if that’s true, and let’s say you’re a trend follower that decided to just do 50% trend, 50% trend, 50% carry, and October of oh eight, happens, your Trend portfolio was up 50% and your carry was flat. You’ve just taken away 50% of the protection, right? So even in the case where it’s a well defined and well diversified carry strategy that you’re attacking onto your risk that your trend following manager, you’re still not going to be there for the per the reason that the allocator wanted you to be there. And I think that’s a fair statement for people that were allocating to trend managers, right? They weren’t allocating to an all weather multi strat. They were allocating for a very specific reason for protection, selecting futures contracts, long short based on carry is more agnostic. It is. It is more like risk parity, trying to chug along as well as possible most of the time. And I think that’s the major difference here, and that’s I would also


Adam Butler  41:33

add that carry and trend are have historically since 1990 had the same probability of acting as an equity diversifier in the worst 20% of equity quarters. In other words, when the S P the 20% of quarters where the S P had the most negative returns, then both carry and trend were equally likely to act as a nice ballast to go up during those quarters, and they don’t tend to go up in the same quarters. They don’t tend to act like ballast at the same time. So you’ve got, I think it’s honestly more helpful to think of trend as having a zero correlation to equities carry on average, right? Sometimes it’s going to have really high correlation equity, sometimes really negative correlation equity carries same sometimes it’s going to have high correlation to equities. Sometimes going to have have negative correlation to equities. And you know, they’re going to be positively or negatively correlated to equities at different times, and therefore there, there will inevitably be be drawdowns where carry acts as a ballast and trend acts as a drag. Is neutral and the and vice versa, they act really nicely together.


Jeff Malec  42:57

And that’s not just trend, but Right? I’ll say global macro, but risk premium, like risk parity, whatever hedge fund style you’re saying, it’s basically the same, selecting


Rodrigo Gordillo  43:07

based on seasonality, selecting based on mean reversion. You know, these are different ways to select, like it’s it’s no different than all these risk premia equity selection. And let’s go back to what people think about most right? They about most right? They think about, how do I pick a better stock? The most popular approach has been value investing, the Warren Buffett style. That’s a style that does pretty well over time, but the selecting based on growth is another style that seems to have done really well. And guess what? It performs well at times when value doesn’t selecting based on low volatility or quality, all of these things are just different ways to skin the equity selection cat. And yes, there is religion involved. And when there’s religion involved, there’s only one solution, when you’re agnostic, when you’re an atheist, and you just look empirically at, are these things real? Are these selection mechanisms likely to continue to exist in the future? Do I have any ability to decide which one’s going to be the best one? Tough. Maybe I should own a bunch, right? And this is just cutting, you know, shining a light on I’ve written a bunch of papers called a different way to manage futures in the past, because I want people to think about think about equities and futures market selection from the perspective of many ways to select, not just trend following. Kerry is another one, but we can. We’re going to continue to write about different methodologies of skinning that that managed futures. Cat


Jeff Malec  44:37

and you touched on something there, like this. You guys might take offense to this, but it’s not like alpha, so to speak of identifying this Kerry like in some people like, oh, what happens when that goes away, right? Or something of that nature. Of like, well, it’s just the price people are paying, the rent they’re either paying or earning. So maybe the rent goes up or down, but it can’t just stop. Working right? There’s always going to be an interest rate. There’s always going to be demand for cash, one side of the other. So talk for a second about that, of how you view it structurally, as why it is and why it will continue to be.


Adam Butler  45:14

I mean, carry will? There will be carries, so long as capital markets function as they were designed to function, as long as risk is rewarded in capital markets. In other words, the risk of tying up your money in equities and not knowing deferring consumption to buy equities, not knowing what price you’re going to be able to sell those equities out in the future, that ambiguity that’s a risk that you are taking on to defer savings or consumption today, as long as people demand higher compensation for locking their money up longer in the bond market, as long as the markets that are funding commodity producers like or prefer lower variability in cash flows to higher variability of cash flows, then the carry premium will will exist, right? It will fluctuate as central banks do their thing and as the economy and inflation do their things, but the reasons for carry to exist are are timeless. If you believe that markets operate in a certain way for a specific reason and that investors are not risk seeking, you know they don’t prefer to lock their money up for negative returns versus consuming something that they want to consume today, for example,


Jeff Malec  46:46

unless they’re very specific commodity investors or something, but we won’t go down that rabbit hole. But so that made me immediately think, Okay, I have an artificial zero interest rate period that would seem like a period where it could quote, unquote break, or be weird, at least, right?


Rodrigo Gordillo  47:05

Maybe in the in the bond side, but is that the case for commodities? But again, going back to different areas, different contracts, different markets will have attractive carry, and at times it won’t be worth investing in that are taking any risk, because there is, there’s like example Adam gave earlier spot contract at 60 features contract 60, there’s no value there until the market has to demand a switch so that speculators are willing to take a risk to hedge out the producers risk. Right? So these are, this is dynamic markets all of the time. And yes, there are going to be economic scenarios in which a single contract, a single sector, will be less attractive than others. And this is where we get back to No you shouldn’t blindly just be buying anything that has a positive carry. You should be thoughtful about selecting your asset classes based on numerous signals that we can call carry that are reasonable to say, Hey, that’s a carry signal that we might want to use to select amongst many others. Much like trend following isn’t just are you above the 200 day moving average or below? Yeah, you’ll make money over time by selecting a trend following managed future strategy on the 200 day, but you you may be better off by using that signal plus the 100 day, moving average plus a two month crossover with a five months but some breakout systems. There’s multiple ways to define what trend is. And similarly, there’s multiple ways to define, in our view anyway, what Kerry is and help us do diversify our signals as well, right? So I think this idea that trying to put a blanket statement, well, when, when we’re exerp, then there’s nothing there, not necessarily true, right? Well,


Jeff Malec  48:54

you could use the crude oil during covid As an example, right? Nobody cared what the interest rate was. There was too much oil. We don’t want your we don’t want the oil. I don’t care if it’s free. Let’s talk. Finish up with the so what? Right? So where are you guys implementing this? Why should we care? The paper’s cool, but then I just want to invest braid and carry. Does it exist as a standalone? Does it exist in your mind only as part of our overall portfolio? Talk through the so what a little


Rodrigo Gordillo  49:29

bit. Yeah. So as we’ve been employing this carry strategy, how long Adam, I think all the way back 2017 I think 2017, within our multi strats, right? And it’s like anything you you find ideas, find strategies, put them together and just tack them on. But once you start zeroing in on the unique characteristics of each one of the strategies that you that you implement, you start learning it’s idiosyn. Crises, when it’s valuable, when it’s not you realize, okay, these are these can be really interesting and intuitive premiums that could be available as standalones for the market. And I think Perry was one that Adam’s been super excited about for years. So it was Andrew, who’s a co author of the paper, I got onto the bandwagon a little later as a very robust standalone and so we started running carry for look we we’ve been running SMA carry for a while. We run a portion of it for the cockroach portfolio that’s been live for two and a half years, had a pretty solid track record. So you know, on our website, you can get access to the standalone carry SMA. We have since we launched this paper, we’ve also think we’re going to be the only ones, as far as I can tell, that we are the trading advisor for the return stacked stocks and futures, yield ETF, and that one runs a carry strategy at a volatility at 10% stacked on top of the S, p5, 100. And so that’s, I one of the easiest ways to get exposure to carry in a stack perspective. And I think, again, I don’t think it’s a standalone we haven’t seen any availability in the US market or globally for that matter. And


Jeff Malec  51:20

I’ll, and I’ll, and I’ll interject real quick. We’re gonna, we’ll throw these guys have done a pod on how their multi strat works. They’ve done a pod with us on return stacking. So we’ll throw all those in the show notes for people to go back and learn all that. Right? The risk parity multi strat one is a master class, and how you guys think of all these pieces working together? Yeah? Yeah.


Rodrigo Gordillo  51:41

And so there’s, you know, there’s ways to get exposure. We have the hedge fund that has a portion of carry in it as a multi strand and the evolution program. We also have rational resolve, adaptive Asset Allocation Fund, which is, again, all the things thrown at once, but as a standalone is, you know, I really find it an attractive story, low correlation to things that people are already used to on the trend side. Low correlation equities. Low correlation of bonds. So I’m super excited about this. This RSS y, ETF is a standalone option for allocators.



C, R, R, Y was taken



that have been the good, wow. Gotta stick to that.


Jeff Malec  52:24

Yeah. And then just quickly in the multi strat. Do you remind me? Are you running each silo separate and then they’ll net off, or are you netting before you get in them? It’s


Adam Butler  52:34

an interesting point, because the long term correlation between equities, sorry, between trend and carry is in the neighborhood of point three. So you can imagine, at any given moment, if you’re running a carry portfolio with 25 futures markets, a trend portfolio with 25 futures markets, the carry might be saying, I want to sell down a market. Same time the trend saying I want to raise exposure to a market or vice versa, if you trade them both in the same account, well, you would just net those two trading signals off against one another, and maybe have no trade to do, yeah, if you were trading them in two different accounts, well, now I got to go long this market in one account, or Add to a position in one account. Go go short, or lower the position, reduce my exposure in another account. So I’m incurring trades in these two accounts, whereas if I traded them together, then there’s no trading, and our just internal research suggests that there’s maybe a 15 to 25% improvement in net returns to the investor from running them in a, you know, running carry trend, and, you know, as many other different types of uncorrelated strategies as possible in one account, so you can net out when their signals kind of offset one another, because you’re Just not having to cross the bid, ask spread, and you’re not having to pay commissions on those excess trades, right? So there’s definitely a benefit to combining these in a single account at the same time, the end investor has a preference for having control over the relative allocations that they want between carry and trend, but also between the stocks and bonds and other core exposures that you know, we run these strategies over, right? So there’s always a bit of a trade off between, you know, we don’t know what else investors have in their portfolios. We can’t see into the minds of our IAS and understand their full philosophy. They need to be able to express their views and their, you know, custom solutions for clients, and we’re giving them the tools to do that. And we’ve created, you know, independent strategies that are maximally efficient to run as distinct strategies and. As overlays on those core exposures. Love it.


Jeff Malec  55:04

One last piece, I forgot they you guys identified in the paper a little that it tended to overweight bonds. Or what was that piece? Talk?


Adam Butler  55:14

Yeah. I mean, if you just look back historically, bonds have had pause a positive yield curve about 85% of the time. Yeah, so it’s probably not a stretch to intuit that a carry strategy would have, on average, a slightly positive exposure to bonds, right? Because over the historical time period bonds have had a positive carry if that period had been mostly negative yield curve, then bonds would have had our carry paper would have shown that bonds had a persistent negative exposure in the carry strategy. Right? So it’s mostly just what’s the prevailing slope of the yield curve, and that’ll determine what the historical average exposure to bonds has been. But


Rodrigo Gordillo  56:07

that speaks to history, yeah, and it doesn’t speak to the present or the future. So this is an important point. A lot of times when people they ask, Hey, I want to know the historical weightings here, and they look at the historical weightings of a carry strategy, they’ll be like, well, you you’ve been long bonds and overweight bonds for X amount of years. This is a very dangerous approach, because, yeah, but of course, you made money. What is 22 What if 2022 happens and there’s an inversion? Well, the reason that it’s been that it’s been high and long and is because there’s been a positive term premium positive carry over time, but it with the way that we have described carry in the paper and implement carry. The moment that that carry becomes negative, you can short and benefit from shorting bonds, as carry strategies have over the last few years. And so there’s no value in looking at history to have any expectations of what may be overweight, underweight, long or short based on looking at recent or historical periods, right? So it’s just looking at the carrying and yes, it is rare that there is negative carrying bond, but when it does happen, you have something that can get out of the way and do it. This goes back to our risk parity discussion that risk parity would say it’s so rare we’re just gonna go keep on being long duration bonds no matter what, versus Gary saying You’re an idiot, we should short them for now, until we until you prove me otherwise, that we are, that it’s worth holding you long again. And


Jeff Malec  57:39

what this is off topic. But have you guys seen right? There was that debate three years ago, like, when the bond bull market unwinds, right? The trend followers managed futures isn’t going to make enough money being short as they may being long, because they’ll be in theory, I guess the curve was maybe supposed to still be positive, even though bonds were going down. So I guess the answer to this that, well, the curve went negative, and bonds went down, and


Rodrigo Gordillo  58:04

you were able to go long energies, and now they’re commodities. Yeah, right. So that’s, that’s


Jeff Malec  58:08

right. The thought was, if you just trend followed bonds and they went right, yields went from 15 down to zero, and then went exactly zero back to 15. That, because of everything we’re talking about, you would make half of what you made from the down move when bonds went back up. Because it’s


Adam Butler  58:25

a great surprise of my career is that people continue to love running trend strategies on stocks or trend strategies on bonds, or carry strategies on currencies or carry strategies of bond. And why they don’t automatically understand that you want to run carry strategies and trend strategies on everything you can get your hands on. Yeah, I continue to see this over and over again by otherwise you know experienced, knowledgeable people, and continue to scratch my head,


Jeff Malec  59:03

is there a practical limit where you guys stay in the futures universe? Like, if you’re like, hey, we’ve got this investment bank and we can fund this shipping route for five versus borrowing it due, right? Like you could carry this pun intended, carry this to its conclusion, and you become like an investment bank, and you’re always borrowing cheaply and investing. There’s


Rodrigo Gordillo  59:25

rich, there’s obviously this concept is universal. You know? Think about it. I was thinking about it from we use the real estate as a great example, right? What you’re doing is you’re selecting a lot of if you’re promoting a real estate portfolio. You’re selecting for properties that and you’re diversifying across geographies. You’re selecting properties that have higher carry than others, but imagine the ability to go long the ones that have the safest locations and the highest yields, and having the ability to short those that still have a positive. Carry, right? But maybe, maybe a small carry is indicative of a decline in prices for those real estate properties. That’s what we see in the future space. We see, we don’t necessarily need to see a negative carry in order to short, we’ve identified that if you, if you select for those assets that have really strong carry and short those assets that have less carry, it’s predictive of price movement, right? So, you know it can, it can apply to everything, and I imagine that it’s, it would apply to real estate or into



shipping. Hey, I see that every day, the long Nashville, short Chicago trade, right? People are moving out in drip Austin, yeah, yeah, long they both probably


Rodrigo Gordillo  1:00:44

still have long carry, but the pricing mechanics are going down right, so you could benefit by shorting one and going long tail.



And the fear is the carry in Chicago just get higher and higher and higher, more taxes, more pension liabilities, but negative carry, yeah, well, yeah, more and more negative, but we’ll leave it there. Any last thoughts?


Rodrigo Gordillo  1:01:08

No, I just think this is a I’m super excited about having this in market. I know that other organizations that try to bring it to market and failed, hopefully with a ton of education, which we’re trying to do, as much of people will wrap their minds around and be as excited about this factor as they are about all the other factors that they know and love. Great compliment.



It’s another factor,


Rodrigo Gordillo  1:01:31

yeah, and but it is just also, like, intuitively, it’s just, I don’t think people have given it or asset like asset management companies are given enough time for education, and so we’re going to do a lot of push. I would love being on these podcasts. We have a webinar that we launched. What was it two weeks ago? If you go to our, and you go to research, you’ll be able to download the paper, download the data, download the webinar. I think we’ve actually posted just the webinar on our YouTube channel as well, if anybody wants to take a look at that. And then the more you give you give yourself a chance to learn about this, and I promise you, you’ll be as excited as we are. And, yeah, that’s really parting words there. And then you can take a look at all the other projects that we’re working on. You know, we got the YouTube channel resolve riffs. We have a new channel called the get stacked investment podcast that people we want to with


Jeff Malec  1:02:30

his shirt off,


Adam Butler  1:02:31

yeah, we tried get jacked podcast


Rodrigo Gordillo  1:02:34

that’s more of a mike Philbrick type of title, and, yeah, you know the joint venture we have with newfound on the website you guys can visit and learn more about how you can grab these different types of premiums and stack them on top of traditional betas, all that stuff is thing, are things that we’re super excited about? Yeah,


Jeff Malec  1:02:58

you guys are crushing it. We’ll put all those links. Adam, any last thoughts?


Adam Butler  1:03:02

No. I mean, I think this is an idea whose time has come. I’m so excited to be one of the first to market with what I think is the base strategy is the global base, you know, first principles portfolio, and, you know, we’re starting out, stacking it on top of everybody’s favorite asset class. And so, you know, I I’m hoping a spoonful of sugar will make the medicine go down, but, yeah, this is the medicine people need right now.


Jeff Malec  1:03:32

Love it. All right, guys, thanks so much. We’ll talk to you next time. Thanks. Soon. Thanks, man. You that. Okay, that’s it. Thanks to Adam and Rodrigo, thanks to resolve for all the great content and research they put out. Thanks to RCM for its support. Thanks to Jeff burger for producing. We’ll see you next week with a former options prop trader turned fund to funds operator, peace.

This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.


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