Key takeaways
- Some headwinds could fade in private equity this year, though the overall backdrop for the market remains challenging.
- Private credit spreads will likely narrow in 2024 as competition increases and sponsors demand more attractive terms.
- In the world of hedge funds, multi-strategy funds look set to continue their outperformance in 2024.
- J.P. Morgan Research is neutral on real estate investment trusts (REITs), given their high sensitivity to rates and current market expectations for Federal Reserve cuts.
- On the other hand, J.P. Morgan Research is structurally bullish on gold, which could peak at $2,300/oz in 2025.
Alternative investments — financial assets that do not belong to conventional investment categories such as stocks, bonds or cash — have grown in popularity in recent years, especially as investors seek to diversify their portfolios. However, they underperformed in 2023 compared with public markets, marking a complete reversal from 2022.
“The share of alternatives in the total asset universe subsided for the first time since the pandemic, falling to 14.9% at the end of 2023. This was down from the record high of 15.5% seen at the end of 2022,” said Nikolaos Panigirtzoglou, Global Markets Strategist at J.P. Morgan.
Despite this underperformance, flows of money remain high. “Fundraising for alternative asset classes in 2023 was very much in line with pre-pandemic levels and remains elevated by historical standards, pointing to still-resilient demand. Fundraising has also had a strong start to the year, which if sustained would make 2024 a significantly stronger year than 2023,” Panigirtzoglou added.
Overall, what is the outlook for alternative investments, and where do opportunities lie? Read on to discover key investment considerations for 2024.
“Fundraising for alternative asset classes in 2023 was very much in line with pre-pandemic levels and remains elevated by historical standards, pointing to still-resilient demand. Fundraising has also had a strong start to the year, which if sustained would make 2024 a significantly stronger year than 2023.”
Nikolaos Panigirtzoglou
Global Markets Strategist, J.P. Morgan
Private equity: A mixed outlook
In private equity — where capital is invested in private companies that are not publicly listed — the overall backdrop remains challenging.
“We see the environment remaining mixed for private equity for at least the first half of 2024,” said Mika Inkinen, Global Markets Strategist at J.P. Morgan. “While markets had begun to price in significant Fed easing by mid-2024 earlier in the year, the ongoing strength in U.S. activity and labor market data have since then seen a repricing, and there are risks that the high interest environment might persist for even longer.”
This means that private equity funds with an older vintage — which refers to the year in which they first drew down capital — will continue to struggle, especially if they have a large share of investments at higher leverage ratios and valuations that were agreed at much lower interest rates. On the other hand, newer vintages look well-placed to weather the higher rate environment and should demonstrate resilient growth.
“In terms of sectors, we continue to see business-to-business (B2B) companies focused on manufacturing and materials as beneficiaries, given a greater emphasis on re-shoring of industrial activity. We also favor energy — including clean energy — given the focus on energy security, electrification and decarbonization,” Inkinen said.
Private credit: Spreads could narrow as competition increases
Deal flow for private credit — where lending is provided by an institution other than a bank — picked up in the fourth quarter of 2023, reversing the slowdown in activity earlier in the year. In addition, capital invested in closed-end private credit funds (excluding dry powder, which is committed but unallocated capital) grew by $140 billion to $1.2 trillion over the first half of 2023.
Within alternatives, the Research team continues to overweight private credit. “New loans are still being originated at much wider spreads — around 300 basis points (bp) wide of public market pricing. Going forward however, private credit spreads will likely narrow as competition increases and sponsors demand more attractive terms,” said Daniel Lamy, Head of European Credit Strategy Research at J.P. Morgan.
“The expectation throughout 2024 is for many private credit deals to be refinanced via the syndicated market, where terms are cheaper,” added Nelson Jantzen, who covers High-Yield Bonds, Leveraged Loans and Distressed Leveraged Credit at J.P. Morgan.
Strong deal flow in the private credit market
Deal flow picked up in the fourth quarter of 2023, largely driven by refinancing, M&A and corporate purposes.
Hedge funds: Favoring multi-strategy funds
Hedge funds — pooled investment funds that hold liquid assets — delivered a total return of 8% in 2023. Plus, assets under management (AUM) surpassed $4 trillion, marking a new historical high.
This was largely thanks to the outperformance of multi-strategy funds, which combine different hedge fund strategies into a single portfolio. “Multi-strategy funds are still on the rise, producing a positive alpha for a third consecutive year in 2023. They attracted a significant $12 billion inflow in 2023, versus an outflow of $10 billion for the overall hedge fund industry,” Panigirtzoglou observed.
In contrast, macro hedge funds disappointed somewhat, with negative returns relative to the benchmark in 2023. “This perhaps explains the subdued end-investor flow into this category, which lost $9 billion last year,” Panigirtzoglou said. Quantitative hedge funds such as commodity trading advisors (CTAs) also underperformed due to the reversal in bonds, commodities and the U.S. dollar in 2023 — a mean-reverting pattern that is likely to repeat in 2024.
“Currently, risk markets are vulnerable due to investor positioning, expensive valuation and underappreciated inflation risk,” Panigirtzoglou said. “As such, we favor less directional hedge fund categories such as relative value, discretionary macro and in particular multi-strategy and multi-manager funds.”
Real estate: Staying neutral on REITs
Real estate investment trusts, or REITs, outperformed in the fourth quarter of 2023 as the market narrative shifted from higher-for-longer to a soft-landing scenario. However, headwinds have since resurfaced. “The start of 2024 saw REITs falling back to the bottom of the table, amid 10-year Treasury yields rising 30 bp from their December lows and negative headlines about commercial real estate in both the U.S. and Europe,” said Federico Manicardi, who covers Cross-Asset Strategy at J.P. Morgan.
Looking ahead, the macro backdrop appears mixed for the real estate sector. “On the one hand, the near-term dataflow aligns with the view that global growth remains resilient and is perhaps even gathering steam at the start of the 2024. On the other hand, risks around the inflation narrative have emerged,” Manicardi said. “Absent a material negative shock, we think this year’s easing will prove more moderate than markets have priced. This is obviously a headwind for REITs given their strong sensitivity to rates and current market expectations for cuts.” In light of these macro conditions, J.P. Morgan Research is neutral on REITs versus other equity sectors.
While REITs were expensive at the end of 2023, they now look fairly valued. “Plus, considering that REITs are now 20% above their October lows, while cap rates for private markets have continued to deteriorate, we also think it is a good time to moderate our preference for REITs versus private funds,” Manicardi added. “Sectorally, we maintain our bias for industrial versus office, but we are more neutral on residential and retail.”
Commodities: Remaining bullish on gold
Gold prices recently hit an all-time high, soaring above $2,260/oz at the start of April. This is as investors increasingly seek out the safe-haven asset against a backdrop of economic and geopolitical uncertainty.
“The jump in gold pricing previews why we remain structurally bullish on the metal over the next year,” said Gregory Shearer, Head of Base and Precious Metals Strategy at J.P. Morgan. “However, with its surge directionality aligned with our bullish targets but trading ahead of our forecasts, the focus now shifts to its staying power.”
Continued moderation in inflation and jobs data over the coming months will likely solidify Fed cut expectations and trigger the next wave of inflows from discretionary funds and ETF holders. “These could push gold prices up toward our $2,300/oz target,” Shearer said.
For more on this topic, read J.P. Morgan Asset Management’s 1Q 2024 Guide to Alternatives.
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