Key Takeaways
- • J.P. Morgan downgraded alternatives to "underweight" from "overweight," citing expected 12-month returns of 10% for alternatives versus 12% for traditional assets, signaling deteriorating relative value in the asset class.
- • Alternative assets have declined 10% year-to-date to $25 trillion in outstanding value, driven by record-high inflation and broad market sell-offs affecting hedge funds, private debt, and other strategies.
- • Despite the decline in absolute value, alternatives have reached a record 13.7% market share of total assets as of 2022, up sharply from 7.6% at the beginning of 2007, reflecting structural growth in the asset class over 15 years.
- • Private equity, private debt, and real estate are lagging in the repricing cycle relative to public markets, which have already priced in significant recession risks, according to JPM analyst Nikolaos Panigirtzoglou.
- • The outlook for alternatives is further clouded by contagion effects from digital assets, including the collapse of TerraUSD stablecoin, which triggered cryptocurrency losses and contributed to bitcoin falling below $30,000 for the first time in 10 months.
Summary
J.P. Morgan's equity research team turned negative on alternative investments on May 25, downgrading the asset class to "underweight" from "overweight" based on relative return expectations over the next 12 months. The brokerage estimates alternatives will deliver 10% returns compared to 12% for traditional assets, marking a significant tactical shift in the bank's asset allocation recommendation.
The downgrade comes as alternative assets have contracted by 10% year-to-date, with total outstanding value falling to $25 trillion. This decline reflects the impact of elevated inflation and widespread market volatility affecting the broader alternative investment ecosystem, including hedge funds, private debt, private equity, and real estate strategies. However, the absolute decline masks a deeper structural trend: alternatives have captured a record 13.7% share of total global assets as of 2022, compared to just 7.6% at the beginning of 2007, demonstrating the significant growth in alternative asset allocation over the past 15 years.
According to JPM analyst Nikolaos Panigirtzoglou, certain segments within alternatives have underperformed in the current repricing environment. While private equity and hedge funds have posted strong absolute returns this year, other alternatives such as private debt and real estate have "lagged somewhat" compared to public market selloffs, which have already incorporated significant recession risk. This divergence suggests selective repricing across the alternative spectrum rather than uniform underperformance.
The outlook for alternatives has been further complicated by contagion from digital asset collapses. The implosion of TerraUSD, one of the world's largest stablecoins, which lost one-third of its value in mid-May, triggered broader cryptocurrency losses and contributed to bitcoin's decline below $30,000 for the first time in 10 months. This digital asset volatility adds another layer of uncertainty to alternative investment returns in an environment already characterized by elevated macroeconomic risks.
The downgrade comes as alternative assets have contracted by 10% year-to-date, with total outstanding value falling to $25 trillion. This decline reflects the impact of elevated inflation and widespread market volatility affecting the broader alternative investment ecosystem, including hedge funds, private debt, private equity, and real estate strategies. However, the absolute decline masks a deeper structural trend: alternatives have captured a record 13.7% share of total global assets as of 2022, compared to just 7.6% at the beginning of 2007, demonstrating the significant growth in alternative asset allocation over the past 15 years.
According to JPM analyst Nikolaos Panigirtzoglou, certain segments within alternatives have underperformed in the current repricing environment. While private equity and hedge funds have posted strong absolute returns this year, other alternatives such as private debt and real estate have "lagged somewhat" compared to public market selloffs, which have already incorporated significant recession risk. This divergence suggests selective repricing across the alternative spectrum rather than uniform underperformance.
The outlook for alternatives has been further complicated by contagion from digital asset collapses. The implosion of TerraUSD, one of the world's largest stablecoins, which lost one-third of its value in mid-May, triggered broader cryptocurrency losses and contributed to bitcoin's decline below $30,000 for the first time in 10 months. This digital asset volatility adds another layer of uncertainty to alternative investment returns in an environment already characterized by elevated macroeconomic risks.
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