Alternatives: Do you want to invest? Here's how to start.

An increasing number of investors are exploring the addition of alternative investments in their portfolios—and it’s easy to see why.

It’s increasingly obvious to us that publicly traded stocks and bonds alone may not provide the results investors seek. At the same time, individuals are gaining greater access to private markets that may help them amplify returns and diversify holdings. 

Unfortunately, why to invest in alternatives is far more obvious than how to invest in them. Incorporating alternatives into portfolios can be challenging for even the most experienced institutional investors.

The alternatives universe has become quite broad, offering an enormous array of asset classes, styles, combinations, frameworks, models and vehicles. Indeed, there are now more than 20,000 private investment funds and 9,000+ hedge funds alone—and performance can vary widely.¹

We have decades of experience helping our clients navigate the complexity of alternatives to create meaningful portfolios that help meet their goals. Here are some key ideas to help you get started.

Our recommended approach to investing in alternatives 

We believe the wisest way to invest in alternatives is to:

• Start by articulating the goals you have for your portfolio
• Assess how much illiquidity you’re comfortable with
• Plan to invest over multiple years
• Build your diversified portfolio—with our assistance (or we can do it for you)

Your objectives

The first step is always to determine what job you would like the alternative investment to do for you. So what is your objective? Portfolio diversification? Mitigating volatility? Generating higher yield? Inflation protection? Return enhancement? All of the above?

Your objectives might make the choice of alternative investments clear, as some alternatives have a distinct, primary function in a portfolio and others have multiple functions. For example, private equity may enhance returns; real estate can help reduce volatility and provide inflation protection. 

However, our view is that most investors are likely to benefit from a diversified alternatives portfolio (here, the sum of the parts can often be greater than the whole). 

Your tolerance for illiquidity

Alternatives are by definition less liquid than public market investments; alternatives investors trade liquidity for return potential.

Unfortunately, fear of illiquidity may be keeping some from reaping the potential benefits of alternatives. They may not realize that a private investor’s commitment is phased in over time—and returns typically come back over time. In other words, your money is not gone at all once, nor is it completely tied up for the length of the investment.

Some of our Private Bank clients are now typically allocating 15% to 30% of their overall portfolios to alternatives. But how much might be right for you depends entirely on your goals.

For example, clients who are investing primarily for future generations and don’t need much current liquidity might allocate even more. We see some clients who allocate as much as 50% to alternatives. But others who need more flexibility, perhaps to keep investing in their businesses, might allocate considerably less.

Your multi-year plan

We recommend that clients diversify across all key factors. That includes sectors, geographies, managers’ skill sets—and time.

That’s right, time is a critical factor that we think you should diversify. Private investments are often referred to as “vintages,” like wine. A fund that starts in 2015 and invests capital over the next three to four years would be called a “2015 vintage fund.” And just like wine, there are vintages that are better than others (investing all your capital in 2007 right before the Global Financial Crisis versus starting in 2009).

We generally recommend that investors should strive for an even commitment pace over four to five years, and recycle capital (and potential profits) thereafter.

Your choice

We recommend starting in one of two ways:  

• Select opportunities from a wide set that we make available. Investors typically can pick from a range of themes they find compelling, such as technology, infrastructure, energy or healthcare. Or they can choose based on geography or managers they like. We can help you identify those and work with you to regularly reassess them
• Invest in a diversified portfolio that we build for you (our “model portfolio”) and which allocates to a variety of underlying funds that we vet and manage. Our goal is to find the most favorable opportunities and the most suitable people investing in those opportunities

We can help

Even the most experienced investors can easily be overpowered by the array of alternative classes, strategies and vehicles now on offer. But you never have to go it alone.

Your J.P. Morgan team and our experienced alternatives specialists are here for you. We are committed to helping you ensure that your selections, no matter where they are sourced, work to help you achieve your long-term financial goals. 

¹U.S. Securities and Exchange Commission, “Private Fund Statistics First Calendar Quarter 2023.” Data as of October 2023. Top- and bottom-quartile private equity managers, for example, on average, a 20% performance differential. In hedge funds, the difference is 14% between top-quartile and bottom-quartile performing managers. Sources: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. Manager dispersion is based on the annual returns for hedge funds and global private equity, and represented by the 10-year horizon internal rate of return (IRR) ending 2Q 2023. Data are based on availability as of November 30, 2023.