Alternative strategy assumptions
11/04/2019
Anthony Werley
Pulkit Sharma
Diego Gilsanz
Please note that our 2020 Long-Term Capital Market Assumptions were originally calculated as of September 30, 2019 and published in November 2019, and thus did not reflect recent extreme price moves in many asset markets resulting from the ongoing COVID-19 disruption. Please refer to the Executive Summary page to discover our updated assumptions as of March 31, 2020. Please reach out to ltcma.inquiries@jpmorgan.com with any questions.
A generally stable, relatively attractive outlook for alternatives
In Brief
Relative to 2019 estimates, our long-term return assumptions for financial strategies are generally neutral to higher. Improved underlying public market return expectations help to offset the perceived challenges to alpha from the sizable wall of cash seeking investment. Projected returns for real assets are, on balance, largely unchanged given stable fundamentals over the past year. For investors looking to alternatives to counter a modest long-term return outlook, thoughtful allocation and prudent selection of top-tier managers remain critical.
| Private equity > | Direct lending > | Hedge funds > |
| Real estate > | Infrastructure > | Commodities > |
Private equity:
PE return assumptions are raised from last year, across fund size and capitalization categories, reflecting our increased public equity market return expectations. Alpha projections are essentially unchanged, given concern with industry operating conditions, balanced by improving “new economy” opportunities globally.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
We have trimmed slightly our return estimates for direct lending, given strong investor demand and increasing lender competition.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
Hedge fund return projections are essentially flat vs. our 2019 assumptions on an equal-weighted basis, reflecting our mixed public market outlook along with challenging alpha conditions. Managers are seeking innovative and global opportunities, awaiting an environment that is more fundamentally driven than macro driven.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
Core real estate return assumptions are essentially unchanged from last year for the U.S., up slightly for the UK and Asia Pacific, and reduced for Europe ex-UK. Regional patterns are similar for value-added assumptions; risk premia are unchanged, given stretched valuations vs. core. For REITs, our global projection is flat, with estimates slightly lower for the U.S., down for Europe ex-UK, up slightly for the Asia Pacific region and up for the UK.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
Infrastructure equity return estimates are flat vs. 2019. We expect increasing investor demand and fee compression to offset the impact from deleveraging and slower asset growth. Infrastructure debt return estimates, based largely on our projection for A to BBB 15-year global corporate credits, are down vs. 2019.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
Commodity returns are expected to rise; the long-term impact of a decline in the USD is likely to more than offset any late-cycle softening in commodity demand. Gold’s premium to broad commodities is projected to increase, given heightened demand from central banks, investors and consumers.
SELECTED ALTERNATIVE STRATEGIES RETURN ASSUMPTIONS (LEVERED,A NET OF FEES, %)
