Mean Reversion in Play: Carry is BACK?!

March 2, 2025. The market opens to a sea of red following news of a U.S. attack on the Iranian regime. Treasuries bleed in anticipation of inflationary supply shocks. Trend-following strategies are in disarray. Tail strategies have not yet reacted. And yet, carry, of all factors, soars.

What’s most interesting is that this strategy is not well known for its convex properties. In fact, carry is more akin to a mean-reversion play—it seeks to profit from convergence in price differentials. So how did this convergent strategy end up benefiting from one of the biggest geopolitical shocks in modern times?

In this post, I’ll go over the properties of the carry factor highlighted in our latest YouTube video to answer the question: Why is carry doing so well? My hope is that by examining this question, investors will be better informed about how to build better portfolios and whether carry should have a strategic slice of the portfolio pie.

If you want to watch our latest episode on the carry factor, make sure to check it out here:

Let’s begin.

Mean reversion in play

The carry factor, in its simplest form, seeks to target higher yielding assets. Pretty simple. The fun part is translating this idea to the futures space.

Because yields should be reflected in the futures curve, carry investors may want to go long contracts in backwardation (contracts that trade below the spot price) and short contracts in contango (contracts that trade above the spot price). In doing so, investors seek to earn the difference between the spot and futures price in the hope that the two converge.

While there are iterations of this idea (watch our YouTube video to see one), carry is by its very nature seeking to buy discounts and sell premiums. Going into March, and depending on the program, carry was largely short equities, long the dollar, and long energy; one of the best combinations if one were betting on an inflationary shock stemming from geopolitical tensions. Specifically, crude oil had been trading sideways since 2022, and the market had priced a discount to the long side.

Overall, it’s unclear whether carry had priced in a risk-off environment, or whether the hottest performers of 2025 (equities, gold) had a premium attached and the worst performers (dollar, oil) had a discount attached—or whether those two are the same thing.

One thing is for sure: mean reversion can look appealing after bullish reversals.

Whether due to luck or structure, carry’s current run reminds us once again of the importance of portfolio diversification.

Breadth matters

There’s no two ways about it: if you wanted diversification during the Iran conflict, you needed to look beyond stocks and bonds. The failure point of traditional portfolios is that they place the diversification burden on bonds and largely ignore inflation risk. Savvy investors should target all four major asset classes (stocks, bonds, commodities, and currencies) and structurally different strategies.

Carry’s epic run is another reminder that diversification is not just about the number of stocks you hold.

Diversification is positional, not predictive

“So, did carry predict the Iranian conflict?” Personally, it’s hard for me to see how it would—or could.

“So, did it get lucky?” Maybe! But I think that ascribing luck to carry’s run takes away a lot of credit from diversification. Did trend following get lucky in 2022? Did tail hedging get lucky in 2020?

Diversification is simply an acknowledgment that you don’t know what will happen next.

Carry investors did not know what was going to happen. They knew that the strategy had suffered over a long stretch, but that diversifying across assets and strategies would pay off eventually. In the end, it was the disciplined who reaped the rewards.

Is it too late?

Anytime an asset rallies, investors fear “piling in,” worrying that the strategy’s run is already over. Here’s the truth: we just don’t know if the rally is over. Carry could get cut in half or double.

And so, if investors want to target the carry factor, they should look inward and ask themselves whether they’re performance chasing or whether they have true conviction in the carry factor. Sometimes emotional portfolio tinkering can look awfully rational.

Perhaps the question one should ask is not “Is it too late to invest in carry?” but “Now that I know about the power of diversifying beyond stocks and bonds, how can I best diversify my portfolio?”