Alternatives across markets, asset classes and economies
As the COVID-19 pandemic enters its third year, investors are still looking further afield to generate asset returns, both geographically and beyond public markets. Volatility is likely to persist, giving rise to a shifting array of price dislocations and unexpected opportunities.
We are helping our clients see the forest and the trees, by considering not just the short-term outlook for markets and economies, but also the bigger picture challenges and opportunities1 across alternative investments.
We are encouraging investors to look across markets, asset classes and economies, and opportunities in alternatives presented by the megatrends of environmental, social and governance (ESG) and technological innovation in the face of challenging and volatile public markets.
Alternatives in an overall portfolio1
The diverse nature of alternatives and options within this asset class provide a robust investor toolkit. Some examples include liquid alternatives, hedge funds, private credit, private equity and real assets such as unlisted infrastructure, particularly renewable energy as economies transition to a low-carbon world.
While some alternatives have a distinct and easily defined primary function in a portfolio (e.g., mutual funds such as liquid alternatives), other categories can be more opaque and play multiple roles. We believe alternative assets have become essential, not optional, for meeting portfolio objectives1 , and we group alternatives according to three main portfolio functions - alpha, income and diversification.
Because Alternatives can behave differently to traditional assets, they can act as potential alpha generators in an overall portfolio1. A thoughtful mix between private and public assets can deliver different outcomes and may help improve portfolio risk/return profile2.
As illustrated in the chart, adding alternative assets may provide opportunities to improve returns1 or lower volatility by allocating from bonds and stocks.
Alternatives and portfolio risk/return2
Source: Barclays, Bloomberg, FactSet, HFRI, NCREIF, J.P. Morgan Asset Management; Standard & Poor’s. Stocks: S&P 500. Bonds: Bloomberg Barclays U.S. Aggregate. Alternatives: equally weighted composite of hedge funds (HFR FW Comp.) and private real estate. The volatility and returns are based on data from the period 30.06.1996 – 30.06.2021. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.12.2021.
As some alternatives are not as sensitive to the economy as others, they can provide relatively attractive yield opportunities while capturing relatively less market risk2 in the current environment.
For example, while many investors seek more income in global high-yield bonds, such bonds have a higher correlation to equity markets and represent a higher risk, when compared with government bonds. Sectors such as transport, direct lending, and global infrastructure can offer relatively attractive yields, as illustrated in the chart below.
Alternative sources of income
Source: Alerian, Bank of America, Bloomberg Finance L.P., Clarkson, Drewry Maritime Consultants, FactSet, Federal Reserve, FTSE, MSCI, NCREIF, Standard & Poor’s, J.P. Morgan Asset Management. Global transport: Levered yields for transport assets are calculated as the difference between charter rates (rental income), operating expenses, debt amortisation and interest expenses, as a percentage of equity value. Asset classes are based on NCREIF ODCE (Private real estate), FTSE NAREIT Global/USA REITs (Global REITs), MSCI Global Infrastructure Asset Index (Infrastructure assets), MSCI Global Property Fund Index –North America (U.S. Real Estate), MSCI Global Property Fund Index –Asia-Pacific (APAC real estate), Global Bloomberg Barclays U.S Convertibles Composite (Convertibles), Bloomberg Barclays Global High Yield Index (Global HY bonds), J.P. Morgan Government Bond Index EM Global (GBI-EM) (Local currency EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), MSCI Emerging Markets (EM equity), MSCI Europe (European equity), MSCI USA (U.S. equity), ASX 200 (Australian equity). Transport yield is as of 30.06.2021, Infrastructure and real estate 31.03.2021. Past performance is not a reliable indicator of current and future results. Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return. Data as of 31.12.2021.
Alternatives for uncorrelated returns
Generally, alternative investments have a low correlation to traditional assets such as equities and bonds and can help offer diversification benefits to an overall portfolio1. Increasingly, investors are looking to invest in strategies built to deliver uncorrelated returns to traditional asset classes.
As illustrated in the chart below, some alternative assets such as macro strategies have low correlation across nearly all assets shown. Even within Alternatives, one asset can behave differently from another, providing additional diversification.
Quarterly returns of public and private market correlations
Source: MSCI, Bloomberg, Burgiss, NCREIF, Cliffwater, HFRI, J.P. Morgan Asset Management. *Europe Core RE includes continental Europe. Private Equity and Venture Capital are time weighted returns from Burgiss. RE –real estate. Global equities: MSCI AC World Index. Global Bonds: Bloomberg Global Aggregate Index. U.S. Core Real Estate: NCREIF Property Index –Open End Diversified Core Equity component. Europe Core Real Estate: MSCI Global Property Fund Index –Continental Europe. Asia Pacific (APAC) Core Real Estate: MSCI Global Property Fund Index –Asia-Pacific. Global infrastructure (Infra.): MSCI Global Quarterly Infrastructure Asset Index (equal-weighted blend). U.S. Direct Lending: Cliffwater Direct Lending Index. Timber: NCREIF Timberland Property Index (U.S.). Hedge fund indices include equity long/short, relative value, and global macro and are all from HFRI. Transport: returns are derived from a J.P. Morgan Asset Management index. All correlation coefficients are calculated based on quarterly total return data for the period 30.06.2008 – 30.06.2021, except correlations with Bitcoin which are calculated over the period 31.12.2010 – 30.06.2021. Returns are denominated in USD. Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return. Data is based on availability as of 30.11.2021.
Our Alternatives platform
With 50+ years of delivering innovative alternative solutions across market cycles, our alternative investment engines are managed by highly specialised independent teams, backed by the global reach, vast resources and robust governance of J.P. Morgan Asset Management.
Through our Alternatives platform, we provide a spectrum of innovative investments that can play a key role in providing new sources of return and portfolio diversification.
Alternatives: From optional to essential
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Our Alternatives Capabilities
280+
Investment Professionals3
US$201 billion
Assets under management
(AUM)3
16
Investment Offices
Worldwide
Focused solutions
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Provided for information only, not to be construed as investment recommendation. Investments involve risks, not all investment ideas are suitable for all investors.
Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
2. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
3. Source: J.P. Morgan Asset Management, as of 30.09.2021. AUM figures are representative of assets managed by the J.P. Morgan Global Alternatives group, and include some AUM managed by other J.P. Morgan Asset Management investment teams. Includes portfolio managers, research analysts, traders and investment specialists with VP title and above.
Our insights
With one of the longest track records in alternatives investing, our team has met and endeavours to continue to meet investor needs in different market conditions. Explore more of our insights.
For more information, please call or email us. You can also contact your J.P. Morgan representative.
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