How to Start Investing in Alternatives
A growing number of investors are exploring the addition of alternative investments in their portfolios and it’s easy to see why. It’s increasingly apparent 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.
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 and build your diversified portfolio.
Defining your objectives
The first step is always to determine what job you would like the alternative investment to do for you. Will it define your objective portfolio diversification? Mitigate volatility? Generate higher yield? Offer 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. Our view is that most investors are likely to benefit from a diversified alternatives portfolio.
Your tolerance for illiquidity
Alternatives are, by definition, less liquid than public market investments. In exchange for liquidity, alternatives investors may be able to access some of the attributes such as return potential and portfolio diversification. Fear of illiquidity may be keeping some from reaping the potential benefits of alternatives.
One important aspect to consider is the fund structure that is right for you. Some alternative investment funds require a 10-year term, where the fund manager phases in your commitment over time, and then distributes back capital as they realize exits in the portfolio. On the other hand, there are evergreen fund structures which may provide opportunities for liquidity on an intermittent basis. We often find that both types of investment structures may have a place in portfolios.
Your multi-year plan
We recommend that clients diversify across all key factors. That includes sectors, geographies and time. That’s right, time is a critical factor that we think you should diversify. Our goal is to find the most favorable opportunities and the most suitable managers investing in those opportunities across private equity, private credit and real assets.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: J.P. Morgan Private Bank Insights, April 19, 2024. “Alternatives: Do you want to invest?” By Mark Hempstead, Head of Alternative Investments, J.P. Morgan Private Bank.
