An alts-rich investment environment on the horizon

While it may be hard to believe, some analysts in the alternative investment space are looking toward what a post-pandemic world may look like. It may not be surprising that alternatives strategies such as hedge funds and infrastructure are expected to come out on top. J.P. Morgan Asset Management (JPMAM) released its annual Global Alternatives Outlook this past week, offering its projections as to what the next year to 18 months will look like for alternative managers and investors. With regard to hedge funds, JPMAM sees “a rich environment for growth”. Most of the pandemic-related dislocations may be behind us, the macro background is positive, the authorities will continue providing both stimulus and liquidity. Economies, accordingly, will rebound. How will hedge funds be in a position to take advantage of that rebound? They can do so by investing in observable megatrends: sustainability, the consumers of emerging markets, cloud computing and healthcare tech, including telemedicine. JPMAM also expects that savvy alternatives investors and managers will benefit in the year plus ahead from the “interesting opportunities” that will emerge from “the improved quality and credibility of SPAC sponsors, acquisition targets and underwriters”. Hedge funds may also benefit from an intersection of concerns about COVID-19 and trends toward sustainable investing. COVID’s social impact has accelerated social and racial disparities in the U.S., and this will make it important for investing institutions to track the diversity of the staff of the companies in which they invest. This will allow savvy investors to pick the ESG winners and avoid or short the losers. JPMAM takes a good look, too, at private infrastructure assets as an investing space looking forward. Investments in private core infrastructure are “expected to be relatively cycle-agnostic” since core infrastructure services are essential whatever the phase of the business cycle. The core refers to regulated and long-term contracted assets such as water, heat, and electricity. On the other hand, there are non-core infrastructure services that have a higher risk, such as port facilities, airports, and toll roads. Prior to 2019, the distinction had blurred in the minds of many investors and the higher risk group was treated as “having a core risk profile.” The year 2020 put that to the test, and institutions that did not make the proper distinctions between the high and the low risk infrastructure projects took a beating. In broad terms, Anton Pil, head of alternatives JPMAM, says, “Our 2021 Global Alternatives Outlook leverages our more than 50-year track record in alternatives to deliver nuanced investment guidance for investors faced with stretched valuations in traditional markets, limited correlation benefits between fixed income and equities, and persistently low bond yields with asymmetric risk.”