Dr K C Gupta, YBB Personal finance

ALTERNATIVES or ALTs are becoming popular – physical commodities & futures-based funds, nontraded funds, private-equity or private-credit. Things beyond the listed stocks & bonds are alts. While embraced by institutions & pension funds for years, the retail investors warmed up to these after the GFC 2008-09 & spectacular failures of the traditional stock-bond allocations to protect them in 2022; institutions allocate about 23% to alts, but individual investors are at about 5% only. 

GOLD & SILVER (10/18/24) & REAL ESTATE Stocks & Funds (11/15/24) were addressed in separate articles.

A newer category of MULTI-ASSET funds includes stocks, bonds & alts in which small portions for alts are carved out from stock & bond allocations. This is seen as an improvement of the traditional allocation/ balanced (hybrid) funds. There are also standalone alts funds.

PRIVATE -equity, -credit & VENTURE-capital have grown as many companies remain private for longer (including several Unicorns). There is plenty of private capital available. Traditional financial firms are setting up private-market units.

Private-equity may trade on platforms such as EquityZen, Forge/FRGE, Nasdaq Private Market, but there are few regulations or disclosures & commissions/ fees are very high. Moreover, private-company CFOs must approve/ reject any proposed trades within 90 days. To participate in private-markets, you must be an accredited investor ($200K+/ 300K+ income or $1+ million assets).

Post-IPO public companies suddenly face lots of disclosures & regulations. The number of US- listed companies has been declining for years.

LIQUID ALTs are the hedge-fund type strategies available in liquid fund wrappers (listed OEFs, ETFs, CEFs). Note that hedge-fund type fees (base percentage plus percentage of profits) aren’t allowed for listed funds, but this area is still lucrative for its institutional & retail reach.

NATURAL RESOURCES is a catchall term for anything obtained from nature.

COMMODITY FUNDS is another broad term for funds that hold physical commodities or futures (derivatives). The commodities include precious metals (gold, silver, platinum, palladium), base metals (copper, aluminum, tin, zinc, nickel, lead), ferrous materials (iron, iron-ore, steel), energy (oil, heating-oil, gasoline, natural gas), ags/softs (grains, coffee, cocoa, sugar, fruits, juices, cotton) & livestock/ meats. It’s not practical to hold most commodities directly, so many of these funds are futures-based. Commodities are very volatile but have low correlations among themselves, or with stocks or bonds.

A commodity can be in contango (with its futures-curve up-sloping) that is indicative of normal supply & demand, or in backwardation (with its futures-curve down-sloping) that is indicative of tight supplies. As these futures-based funds roll futures periodically, backwardation has roll- benefits but contango imposes roll-costs. Most commodity funds generate partnership form K-1 after the yearend that make tax filings bit complex, but there are several commodity funds that generate regular 1099 (K-1 or 1099 is indicated below within parentheses).
General commodity index funds have static weights & rebalance on specific schedules; examples include DBC (K-1), GSG (K-1; 70% energy). Some funds dynamically select & weigh commodity sectors, PDBC (1099), COMT (1099), USCI (K-1).

ENERGY COMPLEX is a broad group of energy equities (not alts), energy futures-based funds, energy distribution entities with tax-preferences (MLPs) & alternative/ renewable energy. Energy equity ETFs can be subdivided into exploration & production (E&P – XOP, IEO, PXE), diversified energy producers (XLE, IYE, FENY, VDE, RSPG), oil-servicing (OIH, IEZ, XES) & midstream MLP ETFs such as AMLP, EMLP, MLPA, MLPX (all of these generate 1099s). For specific company names, look at the top holdings of the ETFs. Crude oil futures-based ETFs include USO (K-1), BNO (K-1), OILK (1099); natural gas ETFs are UNG (K-1), UNL (K-1).
The energy markets also affect the agricultural markets (sugarcane, corn, beets, potatoes) because large sugar producers can make sugar or industrial ethanol (for gasohol) depending on the crops & the demand for sugar & gasoline. The use of biofuels (methane, syngas, ethanol, methanol, butanol, biodiesel, ether additives) is also increasing.

ALTERNATIVE ENERGY sources are hydro, nuclear, wind, solar – some are listed equities, others are alts. There is a general trend towards clean/ green energy. Renewable sources (wind, solar) generate energy intermittently, so energy storage technology becomes critical. The electric-vehicles (EVs) may eventually replace gasoline/ diesel-consuming internal combustion engines (ICE); the gas-electric hybrids may be around as interim solutions. Despite these developments, the reality is that fossil-fuels based energy (oil, natural gas; also, coal in EMs) will remain dominant for the next 10-20 years in the developed countries, 30-50 years in the developing countries.
CRYPTOs (Bitcoin, Ether, Dogecoin, others) are still evolving & may be addressed in a future article.
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