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Alts Agenda – J.P. Morgan PB’s semi-liquids are the tonic for market volatility

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Dear reader. Welcome to the first edition of ‘Alts Agenda’, a new monthly column from Asian Private Banker about the critical trends related to what is undoubtedly the hottest asset class among the region’s wealth managers and their fund selectors. Also, stay tuned for our upcoming, inaugural ‘Alternatives in Focus’ event, to be held in Hong Kong and Singapore, on 28 March and 30 March, respectively.

J.P. Morgan Private Bank (J.P. Morgan PB) believes it has found the antidote to 2022’s market volatility. Its macro hedge fund strategy has generated a roughly 20% return for its clients this year as of October, making it one of the private bank’s top performers for the year. To put that in perspective, the MSCI ACWI index is down more than 17% year-to-date against a brutal backdrop of surging inflation, rising interest rates and simmering geopolitical tensions. That impressive outperformance is set to continue.

“The macro hedge fund strategy will continue to provide above average opportunities for the next 12 to 18 months,” Albert Yang, head of Asia alternatives investments, told Asian Private Banker.

On the private equity side, we look at probably close to 100 managers a year with more than 1,000 investment ideas.

In recent years, the US-based private bank has focused on building a suite of alternative solutions, notably in the semi-liquid space. “For the past four years, semi-liquid income-oriented solutions have become a pretty significant area where clients can deploy capital, which is in addition to the regular liquid hedge funds and illiquid private equity,” explained Yang. He added that “a lot of clients can put 20% to 30% of their liquid investable assets into private investments, which represents a high growth potential for the penetration rate for future decades”.

Semi-liquids grow in popularity

When it comes to semi-liquid solutions at J.P. Morgan Private Bank, among the most popular with clients in the past few years were US commercial real estate and senior secured lending.

“On the income side, most of these type of investments can comfortably provide around a 10% net annual return for investors,” said Yang, who has been with the private bank for almost 12 years. He oversees the alternative investments platform for clients in the region, including Hong Kong, mainland China, Taiwan, and Southeast Asia. J.P. Morgan PB’s global alternatives team has about 130 people.

The firm also offers products focused on areas such as infrastructure – mostly in North America and Europe – as well as transportation and shipping.

“Most of these infrastructure and transportation investments are more for the institutional investors – such as pension plans – as many of the solutions have a very long, such as 10-plus years lock-ups,” Yang explained. “So they are not very attractive to private clients. But with the growing popularity of semi-liquid solutions, we are able to do infrastructure and transportation with less lock-up periods for clients.”

Distressed investments

When COVID-19 first hit in late 2019, many investors were left reeling, unable to determine its impact. While J.P. Morgan PB counted itself among them, the bank also took the opportunity to assess distressed investment opportunities.

“We met about 30 distressed credit trading managers in early 2020 – and we started narrowing it down to a few,” Yang said. Given the uncertainty surrounding the market, the bank opted to provide a bespoke, customised solution to clients on an exclusive basis.

Medical staff in white hazmat suits on a Shanghai street (iStock photo by Getty Images)

The bank ended up working with one manager of a distressed investment fund that included a delayed activation mechanism. In other words, both parties agree in advance on certain criteria related to public and credit markets over a two-year period. If these criteria are hit, the manager will activate the fund and begin deploying capital. If the criteria are not hit, the fund is not activated. “Our clients do not have to pay any fees. We walk away without further commitment to anything,” he added.

In April 2020, a significant widening of credit spreads prompted the manager to activate the fund. In about four months, it had deployed 80% – around one billion dollar – of the capital. The fund gained about 50% within 12 months, Yang said.

Extensive screening

Such exclusive deals do not just materialise out of thin air. Yang and his team engage in lengthy due diligence on a substantial number of investment ideas every year. Over the last 30 years, the firm has launched about 250 funds.

“On the private equity side, we look at around several hundred managers per year with more than 1,000 investment ideas. Then we narrow it down to 25 to 30 ideas for the lengthy due diligence process. The approval process sometimes can take up to over a year. It’s a very low percentage of approved initial ideas, which is similar on the hedge fund side,” he said.

“Performance or numbers are probably a very small part of what we consider or whether we want to recommend a fund or not. In general, we really consider the people and team behind the fund. We find their competitive advantage or edge,” Yang noted.

New to alts?

For clients that are new to alternatives, they often want to invest in what they are familiar with, according to Yang.

“For such cases, usually clients want to choose the industry that they made their original wealth in, such as technology and consumption. But we also highly recommend clients take up a global mindset, which is to diversify what they had and to add some new markets and sectors into their portfolio,” he added.

“Another thing that we introduced clients to is to invest in multiple, or various strategies. Even within private equity, there are probably five or six different sub-strategies you could go [for], in terms of the stage of the company or the type of company,” he said.


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