The historical return opportunities have been quite compelling, with Sharpe ratios as high as 0.70 and an average Sharpe ratio of 0.43. For comparison, the S&P 500 Index achieved a 0.41 Sharpe ratio over the same period. The returns themselves (an average of 2.7%) suggest the need for higher degrees of portfolio leverage to reach satisfactory returns, and the volatilities (an average of 6.4%) allow room for judicious use of leverage. 

Of course, evaluating these strategies on a stand-alone basis ignores the powerful benefits of diversification. Carry, momentum, and value have naturally low or negative correlation to one another. We believe carry strategies provide a return primarily to compensate for exposure to risk. Investors earn the carry as their return if spot prices do not change, and risk manifests through changing spot prices.⁵ Momentum and value, in contrast, aim to take advantage of those changes in spot prices—momentum over the short run, and value over longer horizons. Thus, these three strategies complement each other well, and value in particular helps insulate carry portfolios against crash risk. 

The average pairwise correlation of 0.03, as shown in the following correlation matrix, confirms the strong diversification potential of combining these three strategies: