Carry Trade Pits Value Dislocations In Emerging Markets Against Low Rate Developed Markets

The carry trade – borrowing in a low interest rate sovereign region and investing in a high interest rate regime – has been a stable of many hedge fund portfolios. A November 7 Deutsche Bank report titled “What drives excess returns on FX carry?” point to two factors that point to two factors that led to outperformance as a rotation out of developed markets and into emerging markets “has been the main driver of asset pricing this year,” a move that favors emerging market fixed income.

Classic carry trade has low interest rate regime as the borrow side of the relative value play while emerging markets are the buy...