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?”
About the Author: Jose Ordonez
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Important Disclosures
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded 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 (towards the bottom).
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Facts Only
On March 2, 2025, markets opened with significant declines following reports of a U.S. attack on Iran.
Treasuries experienced losses due to expectations of inflationary supply shocks.
Trend-following strategies struggled, while tail hedging strategies had not yet responded to the event.
The carry trading strategy, which typically profits from price convergence, performed exceptionally well.
Carry involves taking long positions in backwardated contracts (trading below spot price) and short positions in contangoed contracts (trading above spot price).
Prior to the conflict, carry strategies were generally short equities, long the U.S. dollar, and long energy.
Crude oil had been trading sideways since 2022, with the market pricing in a discount to the long side.
The article suggests that carry’s success may be due to diversification rather than predictive ability.
Traditional portfolios often rely on bonds for diversification and may overlook inflation risk.
The author argues that diversification should include stocks, bonds, commodities, and currencies, as well as different strategies.
The piece cautions against performance chasing and encourages investors to evaluate their conviction in the carry factor.
The author, Jose Ordonez, works for Alpha Architect, a firm providing investment research and education.
Executive Summary
On March 2, 2025, financial markets reacted sharply to news of a U.S. attack on Iran, with equities declining and Treasuries under pressure due to anticipated inflationary supply shocks. Amid this volatility, the carry trading strategy—typically associated with mean-reversion rather than crisis resilience—performed exceptionally well. Carry strategies, which involve buying assets in backwardation (trading below spot price) and selling those in contango (trading above spot price), were positioned long the U.S. dollar and energy while short equities ahead of the conflict. This positioning aligned fortuitously with the inflationary shock triggered by geopolitical tensions, particularly as crude oil had been trading at a discount. The article highlights that carry’s success may stem from structural diversification rather than predictive insight, emphasizing that traditional portfolios often fail to account for inflation risk by over-relying on bonds for diversification. While some may attribute carry’s performance to luck, the broader takeaway is the value of disciplined, multi-asset diversification. The piece cautions against performance chasing, urging investors to assess whether they genuinely understand the carry factor’s role in a portfolio rather than reacting to recent gains.
The analysis underscores that carry’s outperformance does not imply foresight into the Iran conflict but reflects the strategy’s inherent exposure to convergent price movements across asset classes. The author advocates for portfolios that incorporate stocks, bonds, commodities, and currencies, as well as distinct strategies like carry, trend-following, and tail hedging. The discussion concludes by questioning whether investors should focus on timing carry’s entry or instead prioritize long-term diversification principles.
Full Take
The strongest version of this narrative is that carry’s outperformance during the Iran conflict underscores the value of structural diversification in portfolios. The article credibly argues that carry, a mean-reversion strategy, benefited not from predictive power but from its inherent exposure to asset classes that thrived in an inflationary shock—namely, energy and the U.S. dollar. This aligns with the broader thesis that traditional 60/40 portfolios are vulnerable to inflation risks and geopolitical disruptions, as they over-rely on bonds for diversification. The piece effectively highlights how carry’s success, while potentially lucky in timing, reflects a disciplined approach to multi-asset investing.
However, the narrative leans heavily on the idea that carry’s performance is a vindication of diversification without fully exploring alternative explanations. For instance, could carry’s positioning have been influenced by pre-existing geopolitical tensions or commodity market dynamics unrelated to the Iran conflict? The article also assumes that carry’s mean-reversion properties are inherently non-convex, yet the strategy’s success in a crisis-like environment suggests a more nuanced relationship between carry and tail risks. Additionally, the piece frames carry as a "forgotten" factor, which may oversimplify its role in institutional portfolios where it is often used alongside other factors.
Root cause: The paradigm here is the ongoing debate about portfolio construction in an era of heightened geopolitical and inflationary risks. The unstated assumption is that traditional diversification methods are insufficient, and that investors must embrace more dynamic, multi-strategy approaches. This echoes historical patterns where financial crises or shocks expose the fragility of conventional wisdom—think of the 2008 financial crisis challenging the efficiency of markets or the 2020 pandemic testing the limits of monetary policy.
Implications: For human agency, this narrative empowers investors to question over-reliance on single-asset-class diversification and consider more resilient portfolio structures. The beneficiaries are those who adopt disciplined, multi-strategy approaches, while the costs fall on investors who chase performance or fail to adapt. Second-order consequences could include increased demand for alternative strategies like carry, potentially reducing their future returns as more capital flows into them.
Bridge questions: What if carry’s success was less about diversification and more about the specific market regime preceding the Iran conflict? How might the strategy perform in a deflationary shock, where its mean-reversion properties could work against it? What other "forgotten" factors might emerge as critical in future crises?
Counterstrike scan: If this were part of a coordinated influence campaign, the playbook would involve promoting carry as a must-have strategy to drive capital into specific funds or products, leveraging fear of missing out (FOMO) after a high-profile success. The article does not exhibit this pattern; it presents carry as one piece of a broader diversification puzzle and explicitly warns against performance chasing. The tone is educational rather than promotional, and the emphasis on discipline aligns with principled investment advice rather than manipulative tactics.
Patterns detected: none
Sentinel — Human
The article shows signs of being written by a human, with a low probability of machine generation or AI manipulation. The author exhibits an idiosyncratic writing style, personal voice, and absence of perfect paragraph structure, which are indicative of human authorship.