While political instability in oil-producing regions and adverse weather have, at times, disrupted oil production, the energy market today is suffering from a severe supply/demand imbalance. Global economic expansion is the main reason for the spike in energy demand, and while the U.S. remains the world's largest energy user, developing countries such as China and India have rapidly become significant energy consumers.

Real interest in alternative energy sources first erupted in the 1970s, precipitated by the shortage and rapid price increases brought on by the Arab oil embargo. As geopolitical tensions cooled and prices returned to lower levels, alternative energy efforts smoldered during much of the 1980s and 1990s. Today, alternative energy is once again a front-burner issue in America, driven by at least three factors that we don't expect to change: supply and demand, concerns about climate change,and national security.

The term "alternative energy" encompasses a broad range of sources in varying stages of development. These include well-established technologies, such as nuclear, hydroelectric, biomass, and wind and solar power as well as others that are considered to be more experimental, such as hydrogen and fuel cells. Solar, wind, wave, and tidal are all considered to be "renewable" energy resources because they are forms of energy that are naturally replenished. In 2005, approximately 9% of total U.S. electricity production was from renewable energy sources.

The promise of these technologies has attracted significant interest from the investment community in a short period of time. Over the past few years the amount of money invested in alternative energy and efficiency technologies has increased from $27.5 billion in 2004 to more than $70 billion in 2006. The majority of the funding has found its way to technologies we believe represent the best investment opportunities today—solar, wind, and energy efficiency.

The amount of sunlight that reaches the Earth each minute produces more energy than the entire human population uses in an entire year. The sun has long been a promising energy source, but remains one of the largest untapped sources of renewable energy—less than 1% of the world's energy needs are currently met by solar energy.

Adoption of solar power generation has been slow primarily because of the high costs involved with manufacturing solar panels relative to the cost of electricity from conventional sources. However, advances in solar technologies have brought production costs for solar cells down significantly and prices are projected to continue dropping. For example, in 1980, a solar cell cost approximately $21 per watt; today the cost per watt is around $3. Lower costs combined with a surge in global energy demand and strong government incentives have helped boost interest and investment in solar power as a viable source of clean energy.

The key material used to manufacture solar cells today is polysilicon. Polysilicon is used not only in the solar industry but also in the semiconductor industry, a fact that has kept the price of polysilicon high and supplies tight. Since polysilicon accounts for about 40% of the cost of a solar panel, rising prices and supply shortages have recently slowed industry growth. These supply constraints, however, have led manufacturers to discover new ways to use polysilicon more efficiently and have accelerated the introduction of a number of different solar cell technologies. Even with today's generous government subsidies, electricity generated from solar power costs substantially more than power from conventional sources. However, we believe new technologies and improved manufacturing processes will ultimately enable the creation of cost-competitive panels with thinner, more efficient solar cells.

For hundreds of years man has harnessed the power of wind for a variety of reasons: sailing, grain grinding, and water pumping, among others. However, wind power was limited primarily to residential or small-scale agricultural uses until the 1970s, when the oil crisis forced the U.S. to look into alternative sources of energy to lessen its dependence on foreign countries for its energy needs. Wind power naturally gained public favor as it was regarded as a highly efficient and clean renewable resource.

In the early 1980s, wind-generated electricity cost as much as 30 cents per kilowatt-hour (kWh), a cost that significantly impeded growth. However, advancements in wind technology cut this cost by more than 80%. Now, state-of-the-art wind farms can generate electricity for less than 5 cents per kWh, making it competitive with conventional electricity that is produced by coal, nuclear power, or natural gas. To date, more than 11,600 megawatts (MW) of capacity have been installed—one MW of wind power generates enough electricity to power approximately 250 to 300 households—making it one of the fastest growing sources of clean energy.

Despite this rapid growth curve, wind accounts for less than 1% of the U.S. power supply. The U.S. Department of Energy has set a goal for 5% of the nation's electricity to be produced by wind by 2010 and several states have followed suit by passing laws that require a percentage of their future energy to come from renewable sources. With a growing number of wind projects currently in development, there is little doubt that wind power is quickly gaining acceptance and will continue to generate greater amounts of electricity in the future. However, we believe wind still has a few obstacles to overcome before it can reach its full potential. Wind's success will depend on further development of more efficient wind technologies that will result in additional cost reductions and on the ability of turbine manufacturers to ramp up capacity to meet the rising global demand.

One of the easiest ways to reduce our dependence on fossil fuels is simply to reduce the amount of power we use. There are many ways to improve the efficiency of existing consumption, including one area with a vast opportunity for improvement - lighting. According to the U.S. Department of Energy, lighting uses 22% of the electricity produced in the U.S., with commercial buildings being the single largest consumer.

Incandescent light bulbs have been the predominant type of lighting for many years. However, sales of compact fluorescent light bulbs, also known as CFLs, have steadily increased since their introduction in the early 1980s. CFLs initially cost more than a traditional light bulb, but over the long run CFLs use less energy and last up to 15,000 hours versus 1,000 hours for an incandescent bulb. The Lighting Efficiency Coalition recently estimated a savings of $18 billion a year in electricity costs while reducing the amount of carbon dioxide in the atmosphere by more than 158 million tons if the U.S. switched to CFLs. While those estimates are quite impressive, light-emitting diodes (LED) technology is even more efficient than compact fluorescent technology.

LEDs are essentially tiny light bulbs that use semiconductor materials such as gallium nitride, or organic materials (OLEDs), to convert electric current into light. What makes LEDs so efficient is the fact that they don't have an electrical filament to heat up. In traditional incandescent bulbs, approximately 95% of the power used is emitted as heat from the filament, while about 90% of CFL power is lost to heat. LEDs lose significantly less energy to heat and are four to five times more efficient than CFLs.

Sector funds enable you to gain exposure to a sector without having to research hundreds of individual stocks. This advantage, however, must be weighed carefully against the risks associated with sector investing. An alternative energy funds, like other sector funds, can be a volatile investment. Because Firsthand Alternative Energy Fund is non-diversified and concentrates its investments in a single sector, the Fund is best suited for investors who are willing to accept the risks associated with sector investing.

For example, a broadly diversified portfolio can often minimze the risks posed to the portfolio by any single sector by investing in hundreds of stocks across several sectors. On the other hand, even though a sector fund may have 50 or 100 or 150 stocks in its portfolio, it is still 100% exposed to one sector. So, while a sector fund has maximum exposure to sector-specific growth, it has maximum exposure to sector-specific risk as well. This is one of the reasons why a sector fund should never comprise 100% of your investments, but should instead represent a small fraction of your total portfolio.

Click here to learn more about Firsthand Alternative Energy Fund. For more information on sector investing and how a Firsthand sector fund might fit your investment needs, please read, "Firsthand Funds and Your Portfolio."

If you are thinking about a sector fund investment, we believe that there are several aspects of our investment approach that are worth considering.

We are headquartered in California's Silicon Valley.

We believe in the importance of firsthand industry experience to successful technology investing. The members of our investment team have technical degrees and years of work experience in high technology.

We have built an extensive network of industry contacts through our collective years of service with technology companies.