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ALTERNATIVES
ALTERNATIVE INVESTMENTS
"Alternative investments” is a broad category, which can evoke feelings of anxiety and alienation for some, and a sense of excitement for others.
To demystify “alts”, we can start by breaking them down into three types: Core, Core Complements, and Return Enhancers.
As a complement to traditional assets, the addition of select, appropriate, alternative investments may improve portfolio outcomes for many clients.
A properly constructed portfolio which includes alternatives should reduce overall risk, and provide higher potential return compared to a traditional balanced portfolio.
The graph below shows the positive impact of including alts like hedge funds, real estate, and private equity to portfolios of only stocks and bonds. In the language of finance and statisticians, we've "shifted" the efficient frontier in such a way that we can now get more return, with less overall anticipated risk.
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Source: JPMorgan Guide to Alternatives. Underlying sources: Bloomberg, Burgiss, HRFI, S&P, FactSet, JPMorgan Asset Management. Alts include hedge funds, real estate, and private equity, with each receiving equal weight. Portfolios are rebalanced at the start of the year. Data is based on availability as of May 31, 2022.
Because of their often complicated structures, long investment horizons, and limited liquidity, we recommend an outcome oriented approach to investing in alternatives. First identify the problem or investment need, that is not readily met by traditional assets, then seek to identify which, if any, alternative asset class and structure is most appropriate.
"The challenges facing investors seeking to build portfolios capable of generating attractive returns with acceptable levels of risk may never have been greater. The traditional 60% stock / 40% bond portfolio mix that has worked effectively for many years needs to be reconsidered."
- J.P. Morgan Asset Management
CORE + COMPLEMENTS + ENHANCERS
Core alternatives form the foundation for more a more extensive alts allocation. Core alternatives range from fixed income-like investments, such as private credit, to “hybrid” categories, such as private market core real assets that can offer both a steady income and some capital appreciation over time.
There are also more equity-like Core alts like low-vol and real asset strategies. Core alts can potentially be higher returning substitutes for traditional fixed income & equity.
The Core alts investments can be complemented with the addition of hedge funds, or other real assets, and enhanced with higher risk/reward private equity and distressed strategies to further diversify the alts allocation and provide for more resilient long-term outcomes than core alternatives alone.
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