(Bloomberg) -- Investors with cash to put to work should consider parking it in hedge funds and real estate as traditional assets like stocks and bonds will underperform next year, according to JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou.
So-called alternative assets, which also include digital currencies, private debt and private equity, “should continue to outperform into 2022,” the strategists wrote. They predict the category will return 11% next year, double the 5% gain from the universe of stocks and fixed income. Crypto may gain, but the ride is likely to be too bumpy to recommend it as a core holding, they said.
The recommendation is part of the team’s inaugural outlook focused on alternative investments, a category of assets the bank estimates at $25 trillion, double the 2014 level. Granted, many of these vehicles aren’t easily accessible and can be hard to exit due to liquidity constraints. While that makes them less than ideal for money managers with an investment horizon shorter than a year, their brighter outlook points to an opportunity to boost performance, in JPMorgan’s view.
“Unlike traditional asset classes, establishing positions and exiting them in size is less straightforward,” the strategists said in the note last week. “It is thus more suited to those institutional investors wishing to allocate new cash flows into alternatives, rather than institutional investors thinking about their strategic/long-term allocations to alternatives.”
Real estate and digital currencies have surged this year partly because investors piled into investments seen as a shelter from inflation. Treasuries are heading for their first annual loss since 2013 amid the Federal Reserve’s signal that it plans to remove emergency support. Meanwhile, market watchers generally expect equity gains to slow in 2022 after the S&P 500’s 20% rally this year, while warnings are getting louder over the traditional 60/40 approach to a balanced portfolio of stocks and bonds.
In the eyes of JPMorgan strategists, hedge funds -- particularly those picking assets based on macroeconomic trends -- are poised to shine as the Fed’s tapering of its asset purchases will spur market volatility and weigh on bond prices. Meanwhile, they see real estate, especially industrial and residential properties, benefiting from the economy expanding at an above-trend pace.
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While digital assets are forecast to climb 15% next year, doubling the expected return from hedge funds and outpacing the 12.5% gain from real estate, cryptocurrencies’ wild swings diminish their appeal, JPMorgan’s outlook says.
Take bitcoin, an asset the JPMorgan team views as a competing investment for gold. With the coin’s volatility roughly four times that of the precious metal, the firm’s model puts its fair value at around $35,000. Should the relative volatility get halved into next year, then a price target of $73,000 “seems reasonable,” the strategists said. The coin traded Tuesday at around $64,000.
“This challenges the idea that a price target of $100k or above, which appears to be the current consensus for 2022, is a sustainable bitcoin target in the absence of a significant decline in bitcoin volatility,” the strategists wrote. “Digital assets are on a multiyear structural ascent, but the current entry point looks unattractive.”