Where JPMorgan Sees the Best Alternative Bets

…And where its quant strategists see a bubble building.

Alex Kraus/Bloomberg

Alex Kraus/Bloomberg

Investing in “value” is one of the best bets for hedge funds in the next 12 to 18 months, according to JPMorgan Chase & Co.’s asset management unit. Strategists expect the factor to rebound in a market shift that will also expose opportunities for short selling high-growth companies.

The bank’s quantitative beta strategists see “a bubble building among lower quality, higher growth names,” per J.P. Morgan Asset Management’s 2020 global alternatives outlook report, expected to be released Wednesday. “The opportunity could come from selective short exposure, rather than just being long the value factor.”

In previous years, the asset management unit had positioned itself to short value stocks broadly, said Anton Pil, global head of alternatives, in a phone interview. Now, he expects to “go long the value factor” for certain companies while betting against individual stocks.

“This year you will see a lot more dispersion between names,” Pil said. “It’s hard to see the same type of returns as we saw last year.”

Stocks soared in 2019, with the S&P 500 gaining 28.9 percent. The hedge fund industry lagged with a 10.4 percent return — its best annual performance in a decade, according to a Hedge Fund Research report this month.

“Easier monetary policy supports a lot of valuations today,” Pil said, explaining that in many cases asset prices look high. With a lot of “central bank liquidity sloshing around globally,” the “money that’s getting printed around the world needs to find a home.”

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As investors globally flock to alternative assets for yield and diversification, Pil sees the need for more nuanced views across hedge funds, private equity, private credit, and real assets. He suggests dividing alternatives portfolios into three parts: core foundation, core complements, and “potential return enhancers” that may deliver equity-like returns.

For example, high-quality transportation assets such as ships or aircrafts could make up part of the core foundation of alternative investments, he said. Hedge funds belong to the core complement category, which Pil described as uncorrelated to broad asset classes and potentially producing seven percent to 10 percent returns with “almost no equity beta.”

Riskier bets in private equity, as well as special situations involving underperforming assets, would fall under “potential return enhancers,” he said.

Within private equity, J.P. Morgan Asset Management favors investing in smaller companies with $10 million to $100 million revenue, according to the report. “These investments tend to stay below the radar and be less leveraged, with less inflated valuations than more prominent mega deals,” the asset manager said.

Meanwhile, J.P. Morgan Asset Management is making a push this year in private credit. For now, Pil prefers lending against real estate to providing buyout loans for midmarket companies.

“Within private credit, investors can move past direct lending to find less crowded opportunities, from private residential mortgages to mezzanine commercial real estate lending,” J.P. Morgan Asset Management said in the report. “Amid nervousness about corporate lending, some of our investors like exposure to U.S. housing and consumer credit.”