The current market environment continues to push institutional investors into alternative assets, seeking both yield and diversification, but not all options are created equal.
Hedge funds, according to JP Morgan’s alternative asset outlook, will gain further traction as new technologies capture investor attention in 2020. “As tech spending continues across industries, our managers anticipate opportunities as digital transformation initiatives go mainstream, such as the broadening adoption of artificial intelligence, the build-out of public 5G networks and the growth of cloud computing.”
This type of development should fuel further capital expenditure this year, noted the report. In addition, it said machine learning will allow hedge fund managers the ability to examine ever-increasing pools of data, giving investors the chance to find alpha potential in new places and hopefully drive higher returns.
Further, the outlook said sustainability will be a major theme for hedge funds this year. “Sustainability is becoming a driver of growth and a disrupter creating investible, structural themes in the marketplace — from millennial habits to metals recycling — as consumers and governments put pressure on businesses to deliver more sustainable products and services.”
As for infrastructure, as demand from major institutional investors has ramped up, the refrain that there’s too much capital in the market chasing too few deals has resonated loudly, according to the report, which noted this tends to arise due to the competition for larger “trophy” assets. Meanwhile, plenty of opportunities exist in more mid-tier assets, especially in the U.S. and western Europe.
In transportation assets, an area in which institutional investors are only beginning to dip a toe, trade tensions are creating some concerns. However, new cleaner fuel regulations for ships could potentially contract the market, supporting elevated rates. “We . . . anticipate that a number of older, less fuel-efficient ships will be demolished, further limiting supply. Finally, we project that average vessel speeds will slow to reduce fuel consumption. Such decreases in vessel speeds lead to supply contraction as vessels take longer to complete voyages, thereby supporting market rates.”
As for private credit, extremely low and even negatively yielding traditional credit instruments have the potential to push private credit into the mainstream this year. With corporate debt levels making investors a little queasy, the report suggested some ways they can take advantage of the relative strength of the U.S. consumer, such as looking at mortgage lending to the financially well-off who are also self-employed, which often disqualifies them from traditional mortgage arrangements.
In real estate, certain less-traditional pockets are getting more institutional investors attention, said the report, especially through real estate investment trusts. Single-family rental REITs allow investors the chance to reach a bundle of income-producing properties over broader geographies that are being managed at attractive margins.
As well, biotechnology labs represent a growing industry and can be bundled as a specific subset of office space, noted the report. Self-storage has proven to be a surprisingly resilient industry, with assets inexpensive to run and with a low beta to the overall real estate market. It also said the demand for data centre space is rising as ideal conditions require a number of specific factors, such as relatively cheap electricity, excellent internet access and low risk of natural disasters.