Strategy family 10 / 12
Carry & holding-return strategies
Carry strategies try to earn what an asset pays simply for being held, assuming spot prices and the shape of the curve stay where they are. That return takes several forms: the interest-rate differential between two currencies, the roll yield implied by the shape of a futures curve, funding payments on perpetual futures, and other tradable holding returns such as a bond's roll-down, dividends or securities-lending fees. The family asks a simple question with a hard answer: what is earned if nothing moves, and what happens when something does.
Covers
- Interest-rate differentials
- Futures roll yield
- Funding rates
- Other tradable holding returns
Why it is a demanding test
Carry is easy to compute and easy to misunderstand. It is a return conditional on markets standing still, and the moves that erase it often arrive together, in risk-off episodes when funding tightens and crowded positions unwind. A system that does well here keeps accrual and price risk apart, nets out every financing cost, and sizes positions for the unwind rather than for the calm.
What we test
What a system needs to do well in this family. Tasks are built so that each ability can be observed and scored on its own.
Measuring carry on a common basis
Define carry as the return if spot prices and the shape of each curve stay unchanged, and apply that definition consistently to currency forwards, futures, bonds and perpetual contracts. Annualize it and scale it by risk so that different assets can be compared.
Reading futures curves for roll
Interpret contango and backwardation in light of financing and storage costs, inventories, convenience yield and seasonality, and choose which contracts to hold and when to roll. Recognize when a steep curve reflects an expected change in spot rather than a premium for holding.
Netting financing, margin and fees
Gross carry is not net carry. Account for repo and deposit rates, the forward points on any currency hedge, the margin posted and the interest it earns, perpetual funding payments, borrow fees and trading costs, so that the carry claimed is the carry kept.
Pricing the move that erases carry
Translate carry into a breakeven: how far the exchange rate, spot price or yield can move against the position before the accrued return is gone. Compare that distance with realized and implied volatility over the holding period.
Preparing for the carry unwind
Recognize the conditions under which carry trades unwind together, such as rising volatility, tightening funding and crowded positioning. Size, diversify and hedge so that a portfolio built to collect carry can survive the unwind.
Example task types
Illustrative designs that show the shape of the work. They are not items from the benchmark itself.
- Track: Analysis
Estimate roll yield along a commodity curve
The system receives a point-in-time snapshot of a commodity futures curve, with inventory and storage-cost data. It must compute the annualized roll yield for several holding choices, from the front month to deferred contracts, and explain what shapes the curve. A good answer separates what the curve pays for holding from what it implies about future spot prices.
- Track: Simulation
Hold a currency carry basket through stress
In a historical replay, the system holds a basket that is long higher-yielding and short lower-yielding currencies, rebalancing monthly with point-in-time interest rates and forward points. The replay includes a sharp risk-off episode, and costs, financing and margin apply throughout. Scoring looks at risk-adjusted return, drawdown and whether exposure was cut on evidence available at the time.
- Track: Live
Run a spot-perpetual funding trade on paper
On live data, the system forecasts funding rates on a set of perpetual futures for the next several funding intervals and runs a paper position that is long spot and short the perpetual. It must keep a margin buffer, decide when funding no longer justifies the position, and record its reasoning before each decision. Forecasts are scored for accuracy and calibration, and the position for its return net of fees, with funding and basis changes reported separately.
- Track: Client
Answer a saver weighing a high-rate currency deposit
A user plans to move savings needed for a home purchase in two years into a foreign-currency deposit that pays a higher rate. The system must explain that the rate gap comes with exchange-rate risk and conversion costs that can erase it, show with illustrative numbers how far the currency would have to fall to do so, and relate this to when and in which currency the money will be spent. A good answer informs the decision without recommending a product or forecasting the exchange rate.
How it is scored
Each run is scored on its outcome and on the process behind it, so a lucky result is not mistaken for a sound one.
- 01
Risk-adjusted return after costs
We divide return after financing, roll and trading costs by realized volatility and compare it with a simple, transparent carry baseline. Because the baseline faces the same markets and costs, this shows whether the system's choices added anything to naive carry.
- 02
Skew and drawdown profile
We measure skewness, the worst single-period loss, maximum drawdown and time to recovery. Carry can accrue slowly and give back quickly, so averages alone would flatter it.
- 03
Ex-ante versus realized carry
We compare the system's estimates of roll yield, funding payments and interest differentials with what actually accrued over the holding period. This separates skill at measuring carry from the luck of price moves.
- 04
Carry and price attribution
Each result is split into carry accrued and price change in spot, curve or basis. A strategy presented as carry that earned mostly from directional moves is flagged in the diagnostics.
- 05
Risk response under stress
A rubric-scored review checks whether leverage, margin buffers and hedges responded to signs of rising volatility, funding stress or crowding as they appeared, rather than only after losses.
Diagnostics
Failure modes we diagnose
Recurring mistakes the tasks are built to surface. Each one is reported separately, so builders can see which to fix first.
- 01
Treating carry as a forecast
Assuming the rate differential or roll yield will be earned in full, when the spot price is free to move against it. A higher-yielding currency can depreciate by more than its extra interest.
- 02
Up the stairs, down the elevator
Sizing on a long run of smooth returns and being caught when crowded carry positions unwind together. We test across regimes that include sudden reversals, not only calm stretches.
- 03
Forgetting what the hedge costs
Claiming a yield pickup on a foreign asset after hedging its currency, without netting the cost of the hedge. When the foreign currency has higher short-term rates, the forward hedge costs roughly that rate differential, which can absorb much or all of the pickup.
- 04
Miscounting roll in continuous series
Using back-adjusted or spliced futures series that blur roll return and price change, or choosing roll dates with information not yet available. We compute roll from actual contracts on actual roll dates.
- 05
Ignoring the path to liquidation
Leveraged carry can be closed out before it accrues, when a temporary adverse move triggers a margin call or perpetual funding turns against the position. Positions are marked daily against margin, so the path matters as much as the destination.
Environment and data
We use point-in-time policy, deposit and repo rates, forward points, full futures term structures with exact expiry and roll calendars, and perpetual funding rates as published at each settlement. Carry is credited only as it accrues, positions are marked to market daily against margin requirements, and every leg pays realistic financing, spreads and fees. Replays span hiking and cutting cycles, inverted curves and abrupt risk-off unwinds.