Hedge Fund Inflows Surge Amid Equity Valuation Concerns, JPMorgan Says

The best opportunities for alternative investing have shifted significantly over the past year, according to J.P. Morgan Asset Management.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Investors have been flocking to hedge funds, an area of alternative investing viewed as a volatility dampener and portfolio diversifier, as markets move toward a post-pandemic world, according to JPMorgan Chase & Co.

J.P. Morgan Asset Management saw record capital flowing into its hedge funds during the last two weeks of 2020 and into the first half of January, according to Anton Pil, the global head of the bank’s alternative investing arm. Investors are viewing hedge funds as a counterweight to stretched valuations in equities, embracing them as a diversification strategy on the expectation that they will produce more yield than fixed income, Pil said in a phone interview.

“They’ve done something which took a long time,” he said of hedge funds, an asset class that had been out of favor with investors. “They delivered returns that have a low correlation to both fixed income and equity,” Pil explained, while generally providing “pretty significant excess returns over cash.”

J.P. Morgan Asset Management’s hedge fund strategies last year produced returns ranging from high single digits to more than 20 percent, Pil said. Investors, meanwhile, face tough challenges finding yield, with the firm forecasting that a traditional portfolio consisting of 60 percent stocks and 40 percent bonds will return 4.2 percent annually over the next 10 to 15 years.

The best opportunities for alternative investing have shifted significantly over the past year, according to J.P. Morgan Asset Management’s 2021 Global Alternatives Outlook report, which is expected to be released Tuesday. While hedge funds remain among the “opportunity set” laid out by bank’s alternative asset management arm for the next 12 to 18 months, subordinated credit and real assets have now entered that framework, as well.


“It’s very critical that investment teams maintain their risk profile to hit their potential target returns,” said Pil. “You can’t just de-risk and assume that you’re going to hit target returns.”

The U.S. Federal Reserve has kept interest rates low in the wake of its unprecedented intervention last year to support credit markets during the Covid-19 crisis. “The markets are being flooded with liquidity from global central banks,” said Pil, with their asset purchases shifting “fairly substantially” the investment opportunities he had spotted in 2020.

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JPMorgan’s hedge fund strategies performed well last year by being active in the crisis, according to Pil. Now he sees pockets of opportunities in assets central banks aren’t buying, including “hybrid” and private fixed income. For example, Pil said he sees value in convertible debt and private mezzanine debt.

Meanwhile, core real assets haven’t rallied because they aren’t on the buy lists of central banks, according to Pil. “Central banks aren’t buying buildings” or infrastructure assets, he said.

Office property, multi-family real estate, industrial and retail properties, and lab space belong to the core real assets category was left behind in the Fed’s sweeping market intervention last year, Pil said.

“We think that’s going to catch up this year as people start mapping out the economic growth that’s going to result in a post-Covid world,” he added. “These assets are fairly inexpensive, and we think are going to do particularly well.”