Negative carry is a situation in which the cost of financing an income is greater than the income it generates. This is important where positions are financed by debt or short-selling.
Negative carry does not necessarily mean that an investment will makes a loss; carrying cost may be less than a capital gain. It may not even be a particularly important factor in the profitability of a position.
Apart from simple borrowing (where the carry cost is the interest), carry cost may be incurred by short selling. This is important, for example, in a number market netural strategies where a short position in security is matched against a long position in another.
Situations where negative carry may be important include:
- reversed convertible arbitrage,
- highly geared positions, particularly if they are held for more than a short time,
- investments in property funded by mortgage borrowing,
- foreign exchange trading.
The opposite of negative carry is positive carry.