J.P. Morgan Asset Management and Singapore sovereign wealth fund GIC have released a research paper on alternative investments in modern portfolios, and their place in portfolio construction. The thesis is that alternatives, including private equity, real estate, infrastructure and private credit, are becoming essential components of investment portfolios as traditional assets face shrinking opportunities for alpha and diversification.
If more businesses are accessible via alternatives because public markets are becoming less attractive for them to list, wouldn’t it be something better addressed by abandoning US-style quarterly reporting in favour of European-style twice-yearly reports?
Alternatives are indeed likely to be an important and increasingly prevalent part of portfolio construction in future. So much so, in fact, that they will cease to be alternative.
The paper also repeatedly emphasises that the perennial data challenges of alternatives create “unique market inefficiencies, creating opportunities for allocators to exploit informational asymmetries to generate alpha” and provide “allocators that have access to a broad array of data and specialised knowledge with a competitive edge”.
Aside from the implied promotion of such allocators, this highlights exactly the kind of inside information that used to be the stock in trade of operators in less efficient markets – like Asia – or that hedge funds claimed to use.
And as the information inefficiencies in alternatives are reduced by the data proliferation advocated by the paper, chances are those opportunities will be whittled away, just as they have been in mature developed public markets.
If alternatives are destined to be a sizeable and indispensable component of portfolio construction in future, they need to be approached responsibly, precisely because they are not a panacea for the ills of traditional portfolios.
The paper also quotes a senior executive of a pension plan who once described their approach to investing in alternatives as “akin to finger painting”. If that’s how institutional investors, particularly US public pension funds, allocated billions of dollars to alternatives, it’s no wonder those funds are in such a mess.
