Liquid alternative to build stronger portfolios (By J.P. Morgan)

The macroeconomic headwinds and elevated volatility currently serving as a cornerstone for much of the prevailing investor uncertainty show little sign of receding. The Brexit vote and the ensuing political and economic uncertainty only amplify the uncertainty.

 

With traditional assets failing in their capital preservation and portfolio stability purposes, investors need to look for something else to help offset the risk generated by equities. Demand to generate returns which are not beholden to the direction of asset markets has become more pronounced.

 

Hedge funds are broadly known for helping to control downside risk, but have historically been the preserve of institutional investors, whether due to transparency, liquidity, access or costs.  Meanwhile, rapid innovation in UCITs has seen tremendous growth in the availability of liquid alternative investment strategies, which offer some of the characteristics of hedge fund exposure in more liquid, cost-efficient and regulated vehicles. Multi-manager liquid alternative strategies, which allow retail investors to tap into diversified hedge fund exposure with daily liquidity, have been increasingly viewed as a source of less correlated returns.

 

Contrary to popular belief, multi-manager liquid alternative strategies do not intend to give investors a rollercoaster ride with the type of annualized returns which will shoot the lights out. Instead the emphasis is on targeting risk-adjusted returns with low volatility and low beta to broad markets through multiple market cycles, by isolating idiosyncratic risk and focusing on relative value opportunities. Capital preservation is also inherent, with a clear onus placed on robust risk management and drawdown protection.

 

Multi-manager liquid alternative funds can play a critical role in enhancing portfolio risk-adjusted return potential by allowing investors access to diverse hedge funds strategies such as:

 

  • Long/Short Equity strategies focus on long and short investments in equity securities that are deemed to be under- or overvalued. The strategy has the ability to capitalize on “winners” and “losers” and to minimize equity market volatility.

 

  • Event driven strategies focus on the opportunities created by industry changing events and corporate catalysts. Corporate actions are creating interesting and differentiated long and short opportunities for event-oriented strategies which are catalyst driven and can offer reduced reliance on broader market moves.

 

  • Relative value strategies seek to profit by simultaneously buy and sell related securities to benefit from pricing differences. This strategy seeks to neutralize market exposure and isolate alpha generation based on price movements between related securities.

 

  • Macro/Opportunistic strategies invest with a flexible approach in a wide variety of securities across countries, markets, sectors and asset classes driven largely by macroeconomic views. This focus on macroeconomic trends allows for lower correlation to other hedge fund strategies.

 

  • Credit strategies are strategies focused on debt and equity securities of firms that are financially stressed or distressed and offers investors a differentiated source of credit exposure.

 

The JPMorgan Funds – Multi-Manager Alternatives Fund draws on multiple hedge fund managers selected by J.P. Morgan Alternative Asset Management, a hedge fund allocator with over 20 years of track record, in order to deliver returns with lower sensitivity to traditional equity and bond markets. The UCITs vehicle provides daily liquidity, transparency and competitive fees. It applies rigorous due diligence and risk management to portfolio construction and dynamically allocates to underlying hedge fund sub strategies, based on their relative attractiveness. The fund taps into a bottom-up fund manager selection process and includes 8 to 12 underlying managers. It targets long-term capital appreciation with low volatility and low sensitivity to traditional equity and fixed income markets. 

 

 

Pascal Bougiatiotis
Product Specialist, J.P. Morgan Alternative Asset Management

 

 

 

 

 

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Issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) Société à responsabilité limitée, European Bank & Business Centre, 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000.