Mechanism
Carry strategies harvest yield differentials when volatility is low and funding is stable. The returns feel smooth, which invites leverage.
In stress, funding conditions tighten and risk appetite flips. Positions are unwound rapidly because many participants hold similar exposures. Liquidity thins at the exact moment everyone wants out.
The result is a classic profile: months of steady gains, then a fast drawdown that erases them.
Process upgrade: turn this truth into a rule you can actually enforce. If the rule can’t be enforced, it will be broken under stress.
- Write the trigger condition in observable terms.
- Write the action in one sentence.
- Write the penalty for breaking it.
How it kills accounts
Carry works → leverage rises → regime shifts to risk-off → crowded unwind → gaps/slippage → drawdown → forced de-risking.
How it kills accounts:
- The rule exists only in your head.
- Stress arrives and you improvise.
- Improvisation becomes inconsistency.
- Inconsistency becomes random results.
- Random results become a slow bleed.
Rule that survives
Treat carry as regime-dependent. Reduce exposure when volatility rises.
Avoid high leverage in carry; carry is not ‘free money’.
Define exit rules that trigger before the crowd panics.
Rule that survives:
- Write the trigger in observable terms.
- Write the action in one sentence.
- Write the penalty for breaking it.
Example archetype
A high-yield currency grinds up for months. Then a shock hits. The move down happens in days and ignores ‘support’. That’s the unwind.
Tell: if your rule isn’t enforceable, it’s a suggestion. Suggestions don’t survive stress.
Deep dive
Carry is a bet on calm
Carry is not just ‘rate differential’. It’s a bet that volatility stays tame and funding stays loose. When that bet fails, the unwind is structural.
Related: Diversification collapses in crisis and Regimes kill models.
Glossary: carry, risk-on/risk-off, tail risk.
Field checklist
- Write the rule in observable terms: if X, then Y.
- Remove choices under stress. Choices become rationalizations.
- Track the precursor: what state were you in before the mistake?
- Make deviations costly (size down, pause, review).
- Turn lessons into gates, not notes.