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3 Themes to Watch in Alternative Investing: J.P. Morgan

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With expected returns from traditional asset classes under pressure, investors have been looking elsewhere — such as to alternatives — in an effort to reduce volatility and enhance returns.

In response to this, J.P. Morgan Asset Management launched the inaugural Guide to Alternatives, the latest addition to its Market Insights program.

Much like J.P. Morgan’s Guide to the Markets, the Guide to Alternatives is intended to provide an objective analysis of the key themes affecting alternative asset classes.

According to David Kelly, chief global strategist at J.P. Morgan, the guide provides unbiased and objective insights on what he says has “historically been a relatively opaque asset class.”

David Lebovitz, global market strategist at J.P. Morgan, explained that the firm — which manages more than $140 billion in alternatives, across every major asset class including private equity, private credit, real estate, infrastructure and liquid alts — tends to think about alternatives as being “either return-enhancing or a little bit more diversifying.”

“We tend to think of things like core real estate and infrastructure as being more in the diversification camp, and private equity and hedge funds as being more in the return-enhancing camp,” he said recently during a media event.

According to Lebovitz, the interest in alternatives has grown recently for two reasons.

“The first is that investors are searching for ways to enhance their returns,” Lebovitz said. “The other thing people are doing is they’re trying to enhance the yield, the income from their portfolios. We’ve seen a lot of folks gravitate to infrastructure strategies, private credit strategies as ways to enhance their income over the course of this cycle.”

The book delivers insight on macro topics such as fundraising and manager dispersion, while also diving into real estate, infrastructure and transport, private credit, private equity and hedge funds in detail.

According to Lebovitz, the new resource can help foster discussion among both institutional investors and financial advisors on risks and opportunities in an increasingly challenging market environment.

Here are three of the prominent themes discussed in the 1Q19 Guide to Alternatives.

1. Striking the right alternative asset allocation balance

Investors have recognized that a sizable allocation to alternatives can give a needed boost to portfolios. Too often, however, investors assemble a collection of independently chosen alternative assets, not giving enough thought to how these investments will work together in a portfolio.

J.P Morgan Asset Management suggests that an alternative asset portfolio consist of of three basic components.

The first is “core foundations,” which includes assets such as core real assets and core private credit providing the potential for stable income with lower volatility. The second is “core complements.” In this component, J.P. Morgan puts assets such as hedge funds able to benefit from increased volatility.

The last component is “return enhancers,” which J.P. Morgan considers assets such as distressed credit and private equity seeking opportunistic returns.

2. ESG integration is now mainstream in infrastructure investing

According to J.P. Morgan, private infrastructure investing has reached a tipping point, as the integration of environmental, social and governance (ESG) standards has become mainstream.

Infrastructure investing has led other asset classes in mitigating climate change risks. According to the firm, this has been driven in part by the need to comply with environmental regulations.

For instance, some examples of where this has been witnessed across J.P Morgan’s portfolios include water companies complying with water conservation goals, renewable energy providers documenting emissions avoided, and the adoption, testing and revision of disaster resilience plans.

J.P. Morgan sees increased opportunity in the renewable energy space as generation capacity increases and the cost of producing solar and wind energy continues to decline.

3. Hedge funds can play a key role in volatile markets

According to the firm, hedge funds can allow investors to play offense as higher volatility takes hold toward the end of the cycle.

In particular, long/short equity funds should benefit from higher short-term yields and greater price dispersion, according to J.P. Morgan. Also, macro and quantitative strategies, which often focus on uncovering short-term inefficiencies, should benefit from higher volatility.

J.P. Morgan thinks these qualities may prove advantageous in the coming year, as correlations continue to fall and price dispersion continues to rise.

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