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J.P. Morgan: Hedge funds set to profit from technology, sustainability transformation

In this delicately balanced investment climate, investors should increasingly consider the role alternatives can play as both a diversifier and a potential source of steady income without adding to a portfolio’s equity risk

Hedge fund managers see opportunities on the horizon in tech disruption and sustainability themes, according to J.P. Morgan Asset Management’s JPM 86,08 -2,35 -2,66% second annual Global Alternatives Outlook survey.

The firm interviewed CEOs, CIOs and strategists from the firm’s alternative investment groups to get an outlook for trends emerging over the next 12 to 18 months.

Stock selection abound in key areas within technology with trends such as the broadening adoption of artificial intelligence, build out of 5G networks and the ongoing growth of cloud computing, according to the firm. Officials said all should fuel CapEx and rising demand for software and services.

“As the current market environment continues to drive investors towards alternative asset classes in search of yield and diversification, our Alternatives Outlook examines strategies across a broad array of alternative asset classes,” said Anton Pil, global head of alternatives at J.P. Morgan Asset Management. “In this delicately balanced investment climate, investors should increasingly consider the role alternatives can play as both a diversifier and a potential source of steady income without adding to a portfolio’s equity risk.”

The advent of 5G in Asia (Korea and China) and further planned rollout is expected to create a tailwind for manufacturers, supply chains and telecoms, spurring M&A. Within this landscape, hedge fund managers anticipate a new generation of industrial applications and opportunities such as connected cars, the internet of things (IoT) and smart cities, according to J.P. Morgan.

Machine learning is also expected to thrive as its increased use will be felt particularly among statistical arbitrage managers. Officials added those managers operating on a shorter time horizon will likely benefit from equity market volatility touched off by the 2020 Presidential election and other uncertainties.

Another trend, carrying over from 2019, is that of sustainability. J.P. Morgan sees the hedge fund industry at an inflection point as this year should be one were managers increase the integration of environment, social and governance (ESG).

ESG was previously seen as part of a risk management approach, J.P Morgan execs say, but now it has begun to be used more widely as a driver of growth and a ‘disrupter’ creating investible, structural themes in the marketplace – from millennial habits to metals recycling.

Transition to a lower carbon economy should influence medium-term money flows too and hedge fund managers within J.P. Morgan’s portfolio call the risk-adjusted returns from this type of investing “sustainable alpha.”

What they dubbed sustainability-led disruption was first seen in power generation (shifting carbon-intensive fuels to wind and solar) and now is expected to include transport, agriculture, automotive, buildings and industrials.

Geographically, J.P. Morgan says hedge fund investors consider Asia an attractive region – particularly Japan, as positive trends in corporate governance continue to unlock value.

Finally, a few overlooked areas present interesting, albeit selective, opportunities, such as special-purpose acquisition companies (SPACs) and closed-end fund arbitrage, including activism.

Risk-wise, hedge fund investors note that full valuations, an increased probability that a less business-friendly candidate could win the U.S. presidential election, strategy crowding and factor volatility all constitute downside risks, J.P. Morgan officials stated.

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