Key takeaways
- Private equity has underperformed its public market counterparts, and ongoing economic uncertainty could potentially delay investment decisions.
- Similarly, returns in private credit markets have lagged those in public markets, even though fundraising increased in the first quarter of 2025.
- The rapidly evolving macroeconomic and political landscape could create opportunities for hedge funds, despite their poor alpha generation year-to-date.
- The overall outlook is optimistic for commercial real estate — particularly the residential sector, which is relatively immune to tariffs.
Alternative investments — financial assets that do not belong to conventional investment categories such as stocks, bonds or cash — have grown in popularity in recent years, especially as investors seek to diversify their portfolios. Total assets under management (AUM) continue to expand and have surpassed $33 trillion to date, according to J.P. Morgan Research.
Despite this growth however, the universe of alternatives — which includes private equity, private real estate, private credit, hedge funds and digital assets — have underperformed their publicly traded equivalents for the third year in a row. “The share of alternatives in the total asset universe drifted lower to 15.2% in the current quarter, down from 15.4% at the end of 2024 and a peak of 16.2% at the end of 2022,” noted Nikolaos Panigirtzoglou, who covers Global Markets Strategy at J.P. Morgan. “The biggest disappointment has been in fundraising, which is tracking an annualized pace of below $1 trillion — the weakest pace since 2016.”
Overall, what is the outlook for alternative investments, and where do opportunities lie? Read on to discover key investment considerations for 2025 and beyond.
“Our expectation is that private equity and private credit will lag their public market counterparts, and that real estate will deliver only modest gains."
Nikolaos Panigirtzoglou
Global Markets Strategist, J.P. Morgan
Private equity: Headwinds have resurfaced
The underperformance of private assets is largely driven by weakness in private equity. “The previous sense of optimism that private equity would be supported by sustained growth, declining interest rates, ongoing U.S. exceptionalism and the Trump administration’s deregulatory agenda has faded as risks of more disruptive policies have materialized,” said Mika Inkinen, who covers Global Markets Strategy at J.P. Morgan.
While private equity posted 7.3% returns for 2024 — a modest improvement from 2023 — it continued to lag listed equity returns of 25% for large-cap companies in the S&P 500 and 12% for small- to mid-cap companies in the Russell 2500 Index. The venture capital (VC) segment’s overall returns for 2024 tracked a more modest 3.6%, reflecting greater ongoing headwinds, although it is a notable improvement to the negative returns of -3% seen in 2023.
Ongoing trade policy uncertainty, in particular, has dimmed the prospects for the sector. “This is in part because tariff uncertainty makes it challenging for businesses to plan ahead, but also because prolonged tariffs could, as the Fed has acknowledged, support both inflation and unemployment, potentially limiting how far it can cut rates,” Inkinen observed.
For private equity funds with a newer vintage (which refers to the year in which they first drew down capital), elevated uncertainty could potentially delay investment decisions. And for older vintages with deals made with higher leverage, such uncertainty could reduce cash flows by prolonging the higher interest rate environment.
Overall, while optimism for the sector has waned, the outlook could improve over the longer term due to structural factors. These include the need for companies to adjust their business models given the ongoing emphasis on re-shoring supply chains, energy security and, more recently, national security.
“We see support for energy, materials and defense within manufacturing. Tech also continues to benefit from secular themes such as AI and an ability to create competitive moats and sustain margins,” Inkinen said. “Finally, while decarbonization efforts have been deprioritized in the U.S., they should be supported elsewhere as they can improve both energy and national security by reducing reliance on external energy sources.”
Private credit: A mixed outlook
In the same vein, returns in private credit markets — where lending is provided by an institution other than a bank — have lagged those in public markets, albeit marginally. U.S. private credit funds returned 8.3% in 2024, compared with 8.7% for high-yield bonds and 9.3% for leveraged loans, according to Preqin data.
“A host of factors may influence an issuer’s decision to access either private credit or syndicated leveraged finance markets. Reasons an issuer may opt for private versus syndicated debt include certainty and speed of execution, the benefits accompanying a smaller group of lenders and generally more flexibility in structures, And then there’s the relative cost of financing, which has varied considerably over time,” explained Daniel Lamy, head of European Credit Strategy Research at J.P. Morgan.
Private credit pricing has held steady over the past 10 months, perhaps indicating that a floor has been reached. However, the gap between private and broadly syndicated loan (BSL) spreads has tightened. “Although this makes private markets more favorable for borrowers, the secondary market for BSLs recovered sharply in May,” Lamy noted. In addition, increased competition between private and syndicated markets has fueled a surge in cross-market financings.
On the capital raising front, global private credit fundraising jumped to $59 billion in the first quarter of 2025, up from $37 billion in the fourth quarter of 2024. This gain came entirely from Europe, which raised a record $31 billion. On the other hand, allocations to funds focused on North America moderated for the second consecutive quarter to $27 billion.
“While the quarterly profile of private credit capital raising tends to be volatile, evidence is accumulating that the slowdown in allocations to the asset class is over for now,” Lamy said. “Overall however, we continue to find private credit less attractive relative to its public market counterparts.”
Global private credit fundraising increased in the first quarter of 2025
Global private credit fundraising increased to $59 billion in the first quarter of 2025, up from $37 billion in the fourth quarter of 2024.
Hedge funds: Still positive on the sector
Hampered by unpredictable market swings, hedge funds have disappointed year-to-date, delivering returns of just 0.17% after fees. This sluggish performance is primarily attributed to equity sector funds, which posted a -4% return, and managed futures, which recorded a -8.8% return. In comparison, global macro and credit funds fared slightly better, delivering modest returns of 2.7% and 1.6% respectively.
Alpha — or the excess returns a portfolio generates compared with its benchmark — is declining too. “Alpha generation for hedge funds had improved markedly in 2024, as subdued bond market performance made it easier for hedge funds to beat a volatility-matched bond/equity benchmark. 2025 seems to be the opposite, as the alpha generated across hedge fund categories appears to be negative so far this year through the end of April,” Panigirtzoglou said.
However, J.P. Morgan Research is still positive on the sector. “Despite a negative alpha year-to-date, we continue to see hedge funds benefiting from a structurally expanded opportunity set due to rapidly evolving macroeconomic, policy, political and market changes and more opportunities in event-driven and credit spaces. In addition, hedge funds offer greater liquidity relative to other private asset classes,” Panigirtzoglou said. “While it remains to be seen whether the poor alpha generation year-to-date will continue or if it improves during the remainder of the year, our bias is for the latter.”
Real estate: Tariff concerns are overblown
The outlook is optimistic for commercial real estate, which is experiencing modest capital growth. Reported sales volumes, which were previously hovering near multi-year lows, also improved markedly in the U.S. during the fourth quarter of 2024.
While transactions slowed in the first quarter of 2025 due to tariff uncertainty, the deceleration will likely be temporary and sales are expected to gradually normalize toward pre-pandemic levels. “In terms of the impact of tariffs on commercial real estate, a common argument is that industrial property could suffer as demand for warehouses could slow from a potential retrenchment in goods trade. We disagree with this view and believe that the reorganization of global trade, supply chains and logistics induced by higher tariffs could eventually create more, rather than less, demand for warehouses,” Panigirtzoglou said.
The office and retail sectors could suffer indirectly if tariffs cause a significant growth slowdown. “On the other hand, we view residential property, which is one of our preferred sectors, as being relatively immune to tariffs unless a deep recession takes place in the U.S., causing a big increase in the unemployment rate,” Panigirtzoglou added. “However, a deep U.S. recession scenario is unlikely in our opinion.”
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