Amid a higher-for-longer interest rate environment and shifting global liquidity, investors are increasingly turning to alternative assets for stability and uncorrelated returns
. Mark Hampstead, head of Alternative Investments for EMEA at
JP Morgan Private Bank, sat down to discuss the evolving landscape of alternative investments and their growing importance in portfolio construction.
In this interview with Gulf Business editor, Neesha Salian, Hampstead emphasises that the asset class, once reserved for the largest institutions and ultra-high-net-worth individuals, is becoming more accessible through innovations in fund structures like evergreen and perpetual funds with lower minimum investments.
He highlights infrastructure and hedge funds as particularly resilient strategies in current volatile market conditions, while noting that the Middle East represents JP Morgan’s largest business and growth opportunity in this space.
Throughout the discussion, Hampstead stresses the importance of diversification, proper manager selection, and building portfolios where different strategies work together to create resilient outcomes over time. Here are excerpts from the chat.
What exactly are alternative investments?
Alternative investments are very interesting. There’s a tremendous amount of opportunity, but they’re also very complex and the underlying definition is incredibly broad. So you think about the traditional public risk assets, stocks and bonds. In a way, it’s basically everything but that, which creates a wide bucket. But I almost would describe it as less of an asset class and more of a means of implementation across all of the different asset classes.
You have the world of private equity, which tends to get talked about the most. But even within that, it can be small cap companies, medium size. You vary by geography. Obviously, the sector in which you invest in can change significantly. And when you look globally, 90 per cent plus of companies are private. So the wealth of opportunity in the global investment landscape is very much concentrated and skewed in this world.
Then you move away from equity and you have the world of private debt — providing being a lender of opportunity. You can go to the world of real assets, infrastructure, traditional real estate. You can go to something very esoteric like timber or agriculture. You add in hedge funds. You have this wide mix.
What is the most compelling element of alternative investments?
I think the most compelling element of alternative investments in general is the simple case of diversification. And that’s an overused term in finance. But with alternatives, you’re just putting together all of these different potential sources of return with different risk and return dynamics. And if you can put together a portfolio of things which can find ways to drive return that aren’t related or correlated to one another, well, that’s how you can build a very resilient portfolio over time.
What allocation do you typically recommend for clients in alternative investments?
The allocation we would typically recommend for alternative investments varies — it depends on your time horizon and your risk-return profile. Our starting point with a client is to ask a number of questions and assess how much we think alternatives should encompass in their portfolio based on all those different circumstances. But let’s just say it’s 15 to 20 per cent on average.The reality is, despite this being an asset class that gets a lot of attention and we talk about frequently, there is still a substantial number of clients who either have no allocation at all or are not close to that strategic allocation.
So I look at it this way: if we think the proper allocation for a client to meet their risk-return objectives is 10 per cent, 15 per cent, or 20 per cent, how can we bridge that gap to get them to that long-term allocation?
Who is investing in alternative investments and how has this changed?
We’re in the range of private clients, but I would say those that are allocating here encompass a very wide range. This used to be an asset class which was reserved for either the largest institutions or maybe the largest private clients, those with a formal family office or something like that.
But I believe as this has come more into the mainstream, for lack of a better word, giving more options, giving options for the types of things you can invest in, giving options for the ways in which you can invest, it’s opening up the asset class more broadly. And again, if you have when looking at the mix of public versus private opportunities, if truly the majority are private opportunities, but that was only reserved for a small group of people. Well, now we’re moving to a world where more and more get access to what is the biggest potential investment opportunity in the world.
The range of clients is incredibly diverse: individuals, families, family offices, more institutional-like clients across the global spectrum.
Where are you seeing the strongest growth in the EMEA region?
Europe or EMEA in general is a very interesting region to work in because it is very fragmented. I mean, differences by culture, country, et cetera. So it almost often does come down to individual country. I do feel like there is a lot of core European countries which are becoming more and more open to global investment solutions, diversifying their portfolio. So in some cases, I would say the growth in my particular area of business might outpace the economic growth in those places.
I think there is some interesting developments in more central Europe and then definitely the Middle East region and the Gulf in looking at the opportunities. It’s robust across country. And I think what’s also interesting is where we used to see wealth created and then invested in international opportunities, you’re seeing more and more invest locally, whether it be in infrastructure, whether it be in different real assets, whether it be in venture capital where the community is growing quite significantly. So the Middle East broadly represents our largest business and some of the largest growth opportunity as well.
Why are family offices and investors allocating significant portions of their portfolios to alternatives, particularly during market volatility?
I would say that as you look at the traditional risk assets, stocks and bonds, the traditional 60-40 portfolio, you’re just seeing that those outcomes are becoming more and more correlated over time. And when you look at, say, the public stock market, for example, you have what is a relatively small set of companies driving a majority of returns.
So if you are trying to look for ways to find investments which can offer some diversification, offer some returns which are not correlated to that broad economic market activity, they’re looking towards alternative investments, whether it’s private credit, infrastructure, hedge funds. These are where you can find some things which are less correlated to those public market factors and therefore in times of volatility are crucial.
The post-financial crisis years were quite benign in terms of volatility. And so maybe the need was less paramount, but as we’re moving into an environment where central banks are behaving differently, you have different interest rate environment, you have more volatile market in general, these strategies are becoming more and more essential.
Does this approach vary regionally?
I think that’s a global mindset. I could point to Europe being a bit more conservative in nature, our Asia clients being a bit more aggressive and opportunistic. But I think in general, just the “how can I broaden out the portfolio and look at other asset classes to help me produce returns which help to mitigate an uncertain world”—that’s consistent globally.
Which investment strategies are showing resilience or outperforming in current market conditions?
Infrastructure investments — I would highlight core infrastructure, just the essential services that make cities run: energy distribution, power generation, water sanitation. Simple, simple things just have been a very uncorrelated asset. When the stock market goes down, people still need water and heating.Even a bit more opportunistic infrastructure, when you think about the opportunity around data centres and energy production, our demand for data, whether it be artificial intelligence or other, is increasing at a parabolic rate and you need the energy and the infrastructure to make that happen.
Renewable energy — how are we going to transition the grid towards being less carbon dependent? And however you look at it globally, in many cases it is the most economic, cheapest source of energy. And so that will be something where you will continue to see that transition happen.
So I think infrastructure is one where that has been a huge beneficiary of providing strong return, strong potential return, but not as correlated to what’s going on in the global stock market.I think another one, which was frankly a more challenging return environment for many years, but is now positioning itself quite well, is hedge funds.
Hedge funds are incredibly diverse. They can mean lots of different things, but many hedge funds, when done well, can offer the ultimate portfolio protection or correlation benefits for a portfolio. And so as you’re seeing a more volatile and disparate market environment, that’s another one which I think has really shown its value.
How are innovations in fund structures making private markets more accessible?
As I mentioned before, this used to be an asset class that was reserved for a small group of people and investors, the largest private clients and institutional investors. Within our business, we’ve been able to really succeed in helping to provide access to these strategies for our client base. But now you are seeing more strategies and you’re seeing creativity in how those are being delivered. So whether it be in evergreen or perpetual fund structures, in cases there’s lower minimum investment — that has really opened up the playing field.
I think that’s a very good thing. The more people that have access to these investments is good for the market and overall wealth creation. I think it also introduces complexities because as more and more strategies come in, the reality is this is still an underlying asset class that is extremely disparate in terms of the potential outcomes. So your dispersion in return between the top end of the spectrum and managers and the bottom end is very large. So more and more access is great, but still the concept of manager selection, finding those that are doing this in the best way is going to be the most important factor.
Where do you see alternative investments expanding next?
We’re in an environment where you do have a lot of choice and the next step of where this goes into retirement accounts and pensions and even further along the spectrum to the more mass affluent client base. This is no longer just the exclusive asset class for the few. It is becoming more a part of the best portfolio we can offer. And if that’s to more people, then it’s a good thing.
How do your conversations with investors typically begin when discussing alternative investments?
The starting point is the simple concepts of what is the return that you’re trying to achieve? What is the risk that you’re willing to tolerate to help achieve that return? And of course, there’s going to be a balance there. And then the important one is, in a world where you have volatility and uncertainty, can we put forth some things that help to smooth the ride along the way and create less volatility in your portfolio along the way? By introducing alternatives, that’s ultimately what we’re looking to achieve.
I would also say that if before you were saying, well, you should invest in this asset class because it can help you mitigate some of that volatility, and when you’re investing in more of these long-term investments where you have a higher potential of return, that’s true. But you’re also just adding the factor here that when you break down the global investment opportunities, the reality is the majority are private. And so if you’re not investing in this asset class, you’re missing out on a substantial part of the global investment opportunity.
How do your conversations typically progress beyond the initial assessment of client goals?
Rather than just jumping in and saying, this is why you should like private equity or private credit, I do think it comes back to, is it one of the main things you’re trying to achieve? Okay, well, in order to achieve that return and with the budget of risk that you have, here’s some things that we can introduce. And at its base level, I think alternatives allow you to either increase your return with the same amount of risk as you had before, or keep the same return that you’ve enjoyed with less risk. And that’s incredibly additive.
I would also add that if before you were saying, well, you should invest in this asset class because it can help you mitigate some of that volatility, and when you’re investing in more of these long-term investments where you have a higher potential of return, that’s true. But you’re also just adding the factor here that when you break down the global investment opportunities, the reality is the majority are private. A lot of people made their money through wealth creation in public stocks. And maybe a lot of the value of wealth creation going forward for companies will take place in the private markets. And so if you don’t have that within your portfolio, you’re missing out on one of those big drivers.
What’s your outlook, particularly around long-term tech trends? How are global investors positioning their alternative portfolios to capitalise on these opportunities?
In private markets, this continues to be the area where you can find some of the most innovative and transformative opportunities. It’s tough to say underappreciated, but I think people are somewhat under allocated to this innovation, just because there was a bit of a reset in prices in 2022.
Artificial intelligence — it’s almost impossible to say that people are under appreciating this, given the amount that we talk about it. But the reality is the winners up to this point within artificial intelligence have been a few public companies, the major companies that we hear about. The next step is going to be in others.
Software — software and artificial intelligence go hand in hand. Software is what we use every day, which is more essential in business than the real estate of the office buildings that we’re in. So those are two technology related sectors that I think are incredibly important and will continue to persist.
Healthcare and biotech as well. Biotech has seen a bit of a bumpy ride in the asset class. But when you break down the demographic trends, the demand, it’s stronger than ever. You have a growing population. You have an ageing population. You have rare disease that can really be handled in a much better way with the technological and scientific innovation that we see. And so all signs are supporting what is a very strong growth opportunity. And while it has been a more volatile ride, the long term picture is strong, as the science is getting better than ever.
How does your firm leverage the rising demand for customised advisory services in alternative investments?
The fact that there is a lot more opportunity, there’s more ways to invest—that’s a very good thing. But the asset class is really factored on the sum of the parts being much more important than any individual strategy. So the whole essence of what we’re trying to put together is, well, how do all of these different things work together in conjunction to create a really robust and diversified portfolio? So it’s not about just saying, oh, let’s go pick the 10 best managers that are out there, because you could own a bunch of things that have the same risk. So you want to find that diversified mix.
When you have a successful asset class, you get lots of new entrants into the asset class. So you have hundreds and hundreds of options of choice. And the reality is the quality will differ. So where we can come in is saying, OK, before we even start to talk about individual strategies, let’s figure out where this fits within your broad portfolio. Going back to what is the return you’re trying to achieve? What is the risk or the volatility that you can stomach? Well, based on that, then that gives us an idea of how much you could put into this asset class.
Now let’s build a portfolio. But you need to build a portfolio with different things that work well together. And then when you actually get to the underlying manager selection, it can involve looking at countless managers to filter that down to a select few, which you might be comfortable investing in. So all of that takes a lot of time and a lot of resource. And I think that’s where we come in to help people manage what is that incredible amount of complexity.
You’ve talked about the opportunities. What are some of the challenges that you see in terms of people looking at this as a significant investment?
Well, there’s some challenges. It is a complex asset class. So you want to make sure that people understand that, understand the risks associated with that. But I think when you can manage that well, you can achieve some really strong outcomes, potential outcomes within your portfolio.
With more choice, that’s a good thing. But also more choice just increases the number of outcomes that you can have. And so really understanding these underlying businesses, really understanding these managers who are investing this money is going to be crucial.
And this isn’t for everyone. It still should be a portion of your portfolio overall. So you’re just trying to get people to understand, well, this is a reasonable amount that you should have in these types of assets. And then once you actually get there, here are the people which we think are going to do a really good job in achieving what you’re looking to get out of this asset class.
How do you approach your own portfolio construction?
If I said I was investing in one company, then that would be pretty disingenuous. I think it’s filled with the stuff that I’m talking about. You can make a lot of money being very concentrated, but that is also a way to lose things fast. And so I think for myself, trying to find all these different areas which are just different ways of making return, then sure, are you selling the huge upside that you could get in one in a hundred or one in a million cases? Sure.
But finance is about having a steady return, trying to compound that over time. And so you’re just trying to protect yourself against anything that can happen. And the world is a pretty uncertain place. And so that is my number one goal when I think about my own portfolio and when I speak to others about theirs.
