A positive carry is a financial position where the net financing cost is lower than the return, generating profits for the person who holds the position. When someone has a positive carry, it is usually a position worth maintaining, because it will earn money for the investor. By contrast, a negative carry costs more to finance than it generates, and is not a good position to maintain, as it costs money for the investor and will continue to do so until the investor can get out of the position.
Often, this term is used in the context of investments with multiple legs. Each “leg” is a different investment, and the goal is to earn on the spread between the legs. This allows an investor to lose money on one leg, earn money on another, and use the difference as profit. For example, someone could take out a loan at 5% and invest the money in a bond repaying 7%. The 2% difference would create a positive carry and an incentive for the investor to maintain the position.
When evaluating investments, people think about whether there will be positive or negative carries, and whether there are investments that could be piggybacked to create a positive carry by assembling multiple legs to support an investment. It may make sense to borrow funds from one source to repay another loan, for example, and to use the initial borrowed funds for another investment.
A complicated web can be woven as someone attempts to take a positive position and profit from investments. This can sometimes backfire for the investor. If one leg of an investment collapses, the investor might not earn a profit, and could get into trouble. This must also be considered when evaluating the risks and benefits of a potential investment, as a positive carry might be extremely risky and the investor could decide that the associated risks are not worth the potential profits.
People relying on advice from financial planners and other people familiar with investment decisions may be offered several options for positions they can take to create a positive carry. These options will be presented with information about potential risks to allow the person to make an informed choice about the best investments to engage in. Numerous factors can impact risks, from the age of the investor to the general condition of the market. Older investors, for example, generally prefer more conservative investments because if they lose money, they may not have time to earn it back.
