In the face of shrinking opportunities for alpha and diversification in traditional assets, alternatives – such as private equity, real estate, infrastructure, and private credit – are becoming essential components of investment portfolios.

However, constructing alternatives portfolios has been a challenge for asset managers because of limited access to fundamental data and a narrower investment universe, among other issues.

In a jointly published research paper, J.P. Morgan Asset Management ( JPMAM ) and GIC offer a more systematic approach to portfolio construction in alternative assets.

The paper proposes a six-step framework for constructing and managing active multi-alternatives portfolios, including establishing investment objectives, identifying the target universe of alternatives, sizing long-term positions, actively allocating capital, integrating risk management, and maintaining ongoing evolution and oversight.

Moving beyond sole reliance on historical trends and qualitative assessments, the framework seeks to address data challenges, capitalize on market inefficiencies, and build resilient portfolios.

The paper underscores the need for explicit quantification of two distinct sources of alpha in alternatives investing, namely:

• Dynamic asset allocation alpha, which is captured through dynamic allocation decisions that exploit return dispersion across alternatives asset classes; and
• Manager selection alpha, which is captured by identifying the performance differential among managers within a single category and investing with outperforming managers, particularly in non-core or capital appreciation-oriented alternatives.

“By combining strategic allocations with active marginal capital allocation, investors can capture alpha and deliver resilient outcomes through thoughtfully sized and actively managed diversified multi-alternatives portfolios,” says Pulkit Sharma, head of alternatives investment strategy and solutions, at JPMAM.