JP Morgan’s Paul Zummo: Hedge funds add alpha, need selectivity

Paul Zummo, chief investment officer and co-founder of JP Morgan Alternative Asset Management, said hedge funds can provide alpha and diversification but require careful selection. He oversees allocation of about $50 billion in external hedge fund solutions for the firm.

Zummo said recent market turbulence exposed strengths and weaknesses across the hedge fund industry and reinforced the need for disciplined portfolio construction. He reported JP Morgan’s hedge fund returns stayed within expectations during the volatility and noted discretionary macro strategies now make up roughly one-fifth of the firm’s hedge fund assets to limit cross-asset correlation when those positions grow large.

He described fixed income income streams as an important diversifier that is not sufficient on its own. Zummo said clients are seeking returns above what fixed income can offer and that the post-2020 environment has been favorable for hedge funds to add alpha and diversification. “The environment for hedge funds post-2020 in terms of adding alpha and diversification is now extremely strong,” he said.

Zummo identified statistical arbitrage as a core area of interest, calling it uncorrelated and alpha-generative and pointing to structural growth and greater sophistication in the sector. He also highlighted thematic directional opportunities, naming Japanese corporate governance and biotech as themes where investors can obtain beta exposure and, with activist or specialist managers, potentially increase returns above the beta.

He warned about the complexity of multi-strategy funds after recent examples in which major multi-strategy firms suffered steep losses when a Middle East conflict disrupted a range of trades; many of those positions later recovered in April. Zummo said investors often underestimate multi-strategy firms’ capital allocation, risk exposures and operational structure. “The reality is these are very sophisticated, complex organisations where it takes a tremendous amount of time to really dig in and understand capital allocations, risk exposures and risk approaches,” he said.

Separately managed accounts have grown in popularity with institutional clients seeking more control over liquidity, financing and operations. Zummo said SMAs are useful for portable alpha setups, where futures or swaps provide beta while a portion of capital is assigned to an alpha source and financing is managed separately. He noted a limited number of managers offer SMA access, and many quantitative managers are primarily accessed through SMAs, so focusing only on SMA-accessible managers would exclude a sizeable part of the opportunity set.

Zummo said the recent period reinforced the need for broad due diligence across managers and strategies and for clear limits on concentrated exposures. He urged investors to pair selective manager choices with operational oversight when deploying hedge fund capital.