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The Carry Trade Carries On

LONDON – The Bank for International Settlements recently reported that $4 trillion a day is traded in global foreign-exchange (FX) markets, up from $3.3 trillion in 2007. But, while the size of the FX business always grabs headlines, the way that currencies are traded also matters – and this has evolved mightily over the years.

Any introductory finance textbook will tell you that investors care about the returns of their overall portfolio, not just its individual assets. Investors prize assets that are relatively uncorrelated, or even better, negatively correlated with the returns of the market as a whole. Owning such assets tends to stabilize overall returns.