Economic headwinds should lead to higher market volatility in 2019, but this could create opportunities for those who use alternative investments wisely, according to J.P. Morgan Asset Management.

Alternative investments will allow investors to execute both offensive and defensive strategies to contend with high volatility by "focusing on assets that generate stable streams of income and strategies that benefit from the disruption that rising volatility creates," the unit of JPMorgan Chase & Co. said in an inaugural global alternative outlook report released on Wednesday.

The report concluded that the U.S. economy is in "late cycle," which typically means that growth is slowing and that a recession could be looming. But analysts at J.P. Morgan Asset Management said that, nonetheless, "we believe that both the economy and markets still have room to run." They predicted that U.S. economic growth will average about 3 percent through the first six months of the year.

"It seems unlikely that 2019 will mark the end of the current economic expansion, but clearly risks are beginning to build," the report stated. "We do not believe this is a reason for investors to move to the sidelines but rather an opportunity to ensure that portfolios are prepared for the unexpected as well as the expected."

The firm's analysts gave the following breakdown on how investors can use the following alternative asset classes:

Hedge Funds

"All else being equal, an increase in market volatility helps generate trading opportunities, and several hedge fund strategies stand to benefit as volatility prompts the relationship among stocks, rates and credit spreads to evolve, affecting prices and correlations," the report stated.

Hedge funds can take advantage of volatile markets by taking long and short positions and by focusing on uncovering short-term inefficiencies, the firm's analysts said. "Those qualities may prove advantageous in the coming year, as fundamentals will likely do more to set valuations and as price dispersion likely grows," they said.

Analysts also predicted that value stocks will rebound in 2019, which could also benefit hedge fund investors.

Infrastructure And Transport

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