Investing
The case for alternative investments
Explore the primary roles alternatives play in a portfolio and why more investors are considering them.
We all have different motivations for why we invest. Some individuals hope to generate enough income to sustain their lifestyles. Others may be seeking ways to grow their wealth over decades, whether to fund a legacy for generations or a comfortable retirement. Financial goals are unique for every individual.
That said, many of the challenges facing today’s investors are universal: The revival of inflation calls for the pursuit of higher expected returns to grow purchasing power over time. Alpha opportunities have generally become harder to find in “traditional” stocks and bonds, and last year’s selloff in bonds left investors seeking more reliable portfolio protectors. Also, the appetite for steady income generation is ever-present.
Alternative investments can help investors solve for many of these challenges. Below, we explore three primary roles they can play in portfolios: Access to broader opportunity sets, enhanced diversification and premium income generation potential.
1. Access to a broader opportunity set of long-term growth potential
Historically, equities have enabled investors to grow their capital over time. However, we have seen a 45% decline in the number of publicly traded companies since 2000,1 and there are now over 7x more private companies than public companies with $100 million in revenue.2 Limiting your investment approach to public markets means missing out on the vast opportunity set in private markets.
Private equity managers often take a hands-on approach, driving operational improvements in portfolio companies. With this expanded access and more comprehensive toolkit, private equity has consistently outperformed global public equity markets by 5–10% annually (see chart below).
2. Portfolio diversification for when the going gets tough
2022 brought the worst year for the stock market since 2008, and the worst year for core bonds on record, leaving many investors seeking ways to better diversify their portfolios.
Enter hedge funds. Hedge funds may help reduce portfolio volatility by using hedging strategies and accessing niche exposures that may generate uncorrelated return streams. Therefore, hedge funds may help a portfolio to compound more efficiently.
Real assets, too, can act as powerful diversifiers in a portfolio. Infrastructure assets, in particular, can offer exposure to essential services with resilient demand and inflation-linked revenue. Similarly, real estate tend to offer historically low correlation to public markets, including publicly traded REITs.
3. Attractive yield generation
J.P. Morgan’s 2023 Long-Term Capital Market Assumptions estimate that total returns in U.S. investment grade bonds could average 4.6% per year over a 10-year investment horizon, but with an average inflation assumption of 2.6%, the real return prospects look less compelling.3
Investors navigating the universe of publicly traded bonds must often accept lower credit quality if they seek higher return potential. For those investors, private credit may be worth a look. Private credit historically has offered premium yields and returns with greater structural protections relative to other fixed income opportunities.4
To boot, as the size of the average high yield borrower has grown, many borrowers are too small to tap into public credit markets; conversely, larger companies may not want to risk the uncertainty or lengthy processes that come with accessing traditional capital markets. Private lenders can fill this financing gap, offering their investors the chance to collect a premium for providing capital where it’s scarce.
WE CAN HELP
Those with the desire—or need—to overcome today’s investment challenges would be remiss not to consider alternative investments.
As always—but especially in alternatives—due diligence and selectivity are essential, as performance can vary widely.5
Many investors choose to partner with us to narrow the alternative investment universe because of our rigorous scrutiny of managers. Our in-house team conducts on-site visits, examining the structure, operations, incentives and individuals on a manager’s team.
As one of the largest alternatives platforms, we set out to continually bring a carefully curated set of high-conviction opportunities to help you realize your goals. If you’re interested in learning more about our alternative investment platform, the latest opportunities, and how they may fit in your financial plan, speak with your J.P. Morgan team, or let us reach out to you by filling out the form below.
IMPORTANT INFORMATION
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 does 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.
As a reminder, hedge funds (or funds of hedge 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.
Real Estate Investments Trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.
This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
Legal Entity and Regulatory Information.
J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
Bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
This document may provide information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). The agreements entered into with JPMS, and corresponding disclosures provided with respect to the different products and services provided by JPMS (including our Form ADV disclosure brochure, if and when applicable), contain important information about the capacity in which we will be acting. You should read them all carefully. We encourage clients to speak to their JPMS representative regarding the nature of the products and services and to ask any questions they may have about the difference between brokerage and investment advisory services, including the obligation to disclose conflicts of interests and to act in the best interests of our clients.
J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document. JPMorgan Chase & Co. or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.
© 2023 JPMorgan Chase & Co. All rights reserved
