Market opportunities are hard to find in a world of high stock valuations and extraordinarily low interest rates, Kepos Capital founding partner and chief investment officer Mark Carhart said Tuesday.
In this environment, there is one thing Carhart is certain of: The traditional 60-40 portfolio split of stocks to bonds no longer cuts it. During CNBC/Institutional Investor's Delivering Alpha conference, he identified the 60-40 split as his top investment risk for next year.
"I wish there was something else that was just as good, or that I could tell you was awesome. Sixty-forty is still going to be part of people's portfolios. The question is, really, how much do you want to have of those traditional asset classes?" he told CNBC's "Squawk on the Street" on the sidelines of the Delivering Alpha conference.
Kepos Capital is a quantitative trading firm that uses computer algorithms to identify market opportunities. It manages more than $2 billion in assets for institutional investors. Prior to founding Kepos, Carhart helmed Goldman Sachs' once high-flying and pioneering quant firm, Global Alpha.
One alternative to traditional stock-and-bond investing Carhart suggested is trend following, a strategy in which investors trade futures and currencies, essentially buying assets that are going up in price and selling those that are falling. This is essentially an application of momentum investing, he added.
Another option is risk factor investing, or buying and selling securities that are exposed to some sort of risk.
"Over time, you get a risk premium, no different than an insurance company gets paid for insuring you against loss of your house," Carhart explained.
One spin on risk factor investing Carhart advocated is emerging currency carry. This involves taking long positions in emerging market currencies of countries with high interest rates, and shorting other currencies from nations with low rates. This allows investors to profit from spreads in interest rate yields.
"When there's a sell-off in emerging market currencies jointly, it's not hit by that same sort of risk factor," he said. "I'm really trying to capture the relative value in interest rates across emerging markets," he said.
