Investment Strategy

Alternatives: Do you want to invest? Here's how to start.

A growing number of investors are exploring the addition of alternative investments in their portfolios—and it’s easy to see why.

It’s increasingly apparent that publicly traded stocks and bonds alone may not provide the results investors seek. At the same time, individuals are gaining greater access to private markets that may help them amplify returns and diversify holdings. 

However, why to invest in alternatives is far more obvious than how to invest in them. Incorporating alternatives into portfolios can be challenging for even the most experienced institutional investors.

The alternatives universe has become quite broad, offering an enormous array of asset classes, styles, and vehicles. Indeed, there are now more than 20,000 private investment funds and 9,000+ hedge funds alone—and performance can vary widely.*

We have decades of experience helping our clients navigate the complexity of alternatives to create balanced portfolios that can help meet their goals. Here are some key ideas to help you get started.

Our recommended approach to investing in alternatives

We believe the wisest way to invest in alternatives is to:

  • Start by articulating the goals you have for your portfolio
  • Assess how much illiquidity you’re comfortable with
  • Plan to invest over multiple years
  • Build your diversified portfolio—with our assistance (or we can do it for you)

Your objectives

The first step is always to determine what job you would like the alternative investment to do for you. So what is your objective? Portfolio diversification? Mitigating volatility? Generating higher yield? Inflation protection? Return enhancement? All of the above?

Your objectives might make the choice of alternative investments clear, as some alternatives have a distinct, primary function in a portfolio and others have multiple functions. For example, private equity may enhance returns; real estate can help reduce volatility and provide inflation protection. 

However, our view is that most investors are likely to benefit from a diversified alternatives portfolio (here, the sum of the parts can often be greater than the whole). 

Your tolerance for illiquidity

Alternatives are by definition less liquid than public market investments. In exchange for liquidity, alternatives investors may be able to access some of the attributes we discussed such as return potential and portfolio diversification.

Fear of illiquidity may be keeping some from reaping the potential benefits of alternatives. One important aspect to consider is the fund structure that is right for you. Some alternative investment funds require a 10-year term, where the fund manager phases in your commitment over time, and then distributes back capital as they realize exits in the portfolio. On the other hand, there are evergreen fund structures which may provide opportunities for liquidity on an intermittent basis. We often find that both types of investment structures may have a place in portfolios.

Some of our Private Bank clients are typically allocating 15% to 30% of their overall portfolios to alternatives. But the right portfolio allocation, as well as fund structure, depends entirely on your goals.

For example, clients who are investing primarily for future generations (and don’t need much current liquidity) might have a higher allocation, as much as 50%. However, others who need more flexibility, perhaps to keep investing in their businesses, might allocate considerably less or explore evergreen fund structures.

Your multi-year plan

We recommend that clients diversify across all key factors. That includes sectors, geographies, and time.

That’s right, time is a critical factor that we think you should diversify. Private investment funds  are often referred to as “vintages,” like wine. A fund that starts in 2015 and invests capital over the next three to five years would be called a “2015 vintage fund.” And just like wine, there are vintages that are better than others (investing all your capital in 2006, right before the Global Financial Crisis, versus starting in 2009).

We generally recommend that investors should strive for an even commitment pace over four to five years, and recycle capital (and potential profits) thereafter.

In evergreen funds, fund managers do this for you. Their portfolios are often diversified across several vintage years, and they recycle proceeds from exited investments into new investments within the fund. One of the main benefits of evergreen funds is their ability to compound returns over time, which is why a phase in approach is less applicable to these strategies.

Your choice

We recommend starting in one of two ways: 

  • Invest in a diversified portfolio. Our goal is to find the most favorable opportunities and the most suitable managers investing in those opportunities across private equity, private credit, and real assets.
  • Select specific opportunities from our platform. Investors can pick from a range of themes they find compelling, such as technology, infrastructure, energy or healthcare. 

We can help

Even the most experienced investors can easily be overpowered by the array of alternative classes, strategies and vehicles now on offer. But you never have to go at it alone.

Your J.P. Morgan team and our experienced alternatives specialists are here for you. We are committed to helping you ensure that your selections, no matter where they are sourced, work to help you achieve your long-term financial goals. 

 

*U.S. Securities and Exchange Commission, “Private Fund Statistics First Calendar Quarter 2023.” Data as of October 2023. Top- and bottom-quartile private equity managers, for example, on average, a 20% performance differential. In hedge funds, the difference is 14% between top-quartile and bottom-quartile performing managers. Sources: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. Manager dispersion is based on the annual returns for hedge funds and global private equity, and represented by the 10-year horizon internal rate of return (IRR) ending 2Q 2023. Data are based on availability as of November 30, 2023.

Alternative investments can help with portfolio diversification as well as provide inflation protection. Read more about how to invest in alternative assets.

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KEY RISKS

Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments involve greater risks than traditional investments and should not be deemed a complete investment program. They are not tax-efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. The value of the investment may fall as well as rise, and investors may get back less than they invested. Diversification and asset allocation do not ensure a profit or protect against loss.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds and real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

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