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Risks with Commodity MLPs

Investing in commodities through master limited partnerships (MLPs) comes with a number of risks. Here’s a quick list of some of those risks so that you don’t come upon any surprises when you get your K-1 tax form in February:

  • Management risk: Because as a limited partner you have no say in the way the business is run, you’re essentially handing over control to the general partner to manage the MLP as she sees fit. If you’re not satisfied with the GP’s performance, you can’t do anything about it except withdraw your money from the MLP.

  • Environmental risk: Many MLPs operate sophisticated infrastructures such as pipelines and drilling rigs, which are often vulnerable to natural disasters such as hurricanes and earthquakes. Any of these may have a negative impact on your bottom line.

  • Liquidity risk: Because the MLP market is still fairly small compared to other assets such as stocks and bonds, you may face liquidity issues if you want to dispose of your units. Until liquidity increases in the MLP market, you risk not finding a buyer for your units.

  • Terrorism risk: MLPs’ assets often include sensitive infrastructures that may be vulnerable to a terrorist attack.

These risks are a few of the risks associated with MLPs, which is still a growing market. However, because of the beneficial structure and scope of operations of these entities, they have a place in any diversified portfolio.

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