‘Alternative’ Might Just Mean ‘Unfamiliar’

April 23, 2012

For example, contrast stocks with commodities. There are large and small stocks, growth and value stocks and lots of sectors—but they are all stocks, and a major market move can sweep most of them higher or lower regardless of whether they individually deserve to be so repositioned. They are a true asset class, a cohesive grouping of securities that usually react similarly to economic cycles and that have many other common characteristics.

But beware of transposing this asset-class attitude to commodities. There is no singular commodities market. There are, instead, commodity markets. Each one is driven by its own supply and demand factors, which can be radically different from one to another—even when the commodities themselves are related, such as crude oil, gasoline and heating oil. Stock-oriented investors almost always got burned when venturing into commodity markets because of this diversity.

Until, that is, the advent of diversified commodity indexes led to investment vehicles that bundled these individual, disparate markets into one price. Then the floodgates opened, and some $200 billion to $300 billion has flowed into commodity funds, notes and other investment vehicles over the past 20 years because the complicated was magically rendered simple. Or so it seemed.

Underneath, though, commodities are still the churlish individualists they always have been. Just ask the immigrated investors who have reluctantly expanded their “price-earnings” vocabularies to include “Brent” and “WTI,” not to mention “contango” and “backwardation.”

Perhaps the time will come when the now-murky risks of commodities, commercial real estate, timberlands and even vintage wines also will be “known devils.” Until then, the alternatives bucket will continue to seduce some investors and repel others with mysterious booms and busts.

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