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Wine – The Illiquid Liquid Alternative

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Stockholm (HedgeNordic) – Some investors may view alternative investments as assets that can diversify a portfolio. But some are more exotic and esoteric investments within the alternatives space than others. Think classic cars, fine art, bottles of whisky, some of which we have already introduced. Fine wine is one such investment, an emerging alternative asset class that benefits from two features – healthy demand and limited supply – that make it an attractive investment for long-term-oriented investors.

Lars Granat Jensen, RareWine Invest.

“Stable returns and low risk are the main characteristics of wine investment,” explains Lars Granat Jensen of RareWine Invest, a Danish firm offering individuals a platform for investing in wine. Fine wine’s attractive investment characteristics stem from attractive supply-demand dynamics due to its inverse supply curve. “The market is mainly driven by simple factors such as supply and demand,” says Jensen.

Three underlying factors are driving the fine wine market’s supply-demand dynamics, according to Anders Tang, the founder and CEO of another Danish company – Jero – providing services across the whole investment journey of wine. “First, there is scarcity of supply due to limited production,” starts Tang. Only specific vineyards in certain wine-growing regions have the qualities and recognition to produce top-quality wines. “The best vineyards in the world are at full production, so you have a limited supply,” says Tang.

Anders Tang, Jero.

“Production cannot be increased,” Jensen corroborates Tang’s observation. “Actually, climate change could mean even lower production of the best wines in the world in a longer-term,” argues Jensen. Another factor affecting the supply-demand dynamics is the consumption of wine, with supply actually decreasing as more of the wine is opened and drunk. “Over time, consumption will lower supply and prices will rise,” says Jensen. As time passes, there are fewer and fewer bottles in the fine wine market without demand falling, according to Tang of Jero.

The third underlying “supply-demand”-affecting factor is increasing demand. “Growing world population and the rise of ultra-high-net-worth individuals will increase demand for the best wines in the world,” says Jensen. The number of ultra-high-net-worth individuals is expected to increase by about 30 percent over the next five years, according to The Wealth Report by Frank Knight.

“Rising demand, stable to declining production, ongoing consumption provide optimal conditions for making supply and demand dynamics be the primary influence on the price development of wine.”

“More and more people are getting wealthy, with countries like India and China seeing more wealthy people every day,” confirms Tang of Jero. “As a result, the demand for fine wine either for consumption or for investment is increasing at a rapid pace,” he continues. “Rising demand, stable to declining production, ongoing consumption provide optimal conditions for making supply and demand dynamics be the primary influence on the price development of wine,” summarizes Tang. “This combination of factors makes wine a really attractive asset for long-term investment.” Jensen agrees, emphasizing that “wine investment is a long term investment.”

Investment Characteristics

Investible fine wines offer low correlation with traditional asset classes, attractive returns over the longer term and bond-like volatility. “If we compare to traditional assets, wine is somewhere in between government bonds and the stock market, though closer to bonds than stocks in terms of risk,” argues Lars Granat Jensen from RareWine Invest, an associated company of RareWine which has traded professionally in rare and fine wines globally for more than a decade.

“If we compare to traditional assets, wine is somewhere in between government bonds and the stock market, though closer to bonds than stocks in terms of risk.”

“Basically one can say that the returns are better than bonds and the risk is lower than stocks,” summarizes Jensen. “Certainly Champagne and Burgundy have been the best performing wine areas during the last 15 years, but if we look a the total market for fine and rare wine, one should expect approximately 8 percent return per year.” In the period 2005-2020, the broadest wine index on the wine exchange Liv-Ex had a higher Sharpe ratio than both gold and stocks. The Liv-ex Fine Wine 100 Index delivered an annual return of 8.4 percent with a volatility of 5.1 percent to reach a Sharpe ratio of 1.53, over the 0.57 Sharpe ratio for gold and 0.61 for the S&P 500. “If the story repeats itself, then it suggests that adding wine to a diversified investment portfolio can optimize the portfolio’s risk-adjusted return,” says Tang.

“Wine investments generally exhibit low correlation with financial markets as wine price formation is not determined by the factors driving broader markets.”

“Wine has historically been shown to have a low correlation with the financial markets, which makes wine as an investment asset particularly suitable for diversifying and reducing portfolio risk,” explains Anders Tang. “Wine investments generally exhibit low correlation with financial markets as wine price formation is not determined by the factors driving broader markets,” he elaborates.

“The demand for wine goes beyond the immediate benefits as an investment asset, it is also driven by passionate consumers,” according to Tang. “This does not mean that wine investment is without risk of loss of value,” he acknowledges, adding that “it is very likely that wine price formation will continue to be determined by internal factors and behave differently from stocks, bonds, etc., which fluctuate more based on general market sentiment and political intervention.”

Wine as an Inflation Hedge

In an environment of high and rising inflation, an allocation to fine wine can also fulfill the role of inflation protection, according to both Lars Granat Jensen and Anders Tang. “Rising production cost, inflation and more sustainable production methods will make production more expensive in the near future,” says RareWine Invest’s Jensen. “In addition to the development of the general supply and demand, the value of exclusive wine in the future is determined by the cost of production and the consumer’s ability and willingness to pay a higher price in the future,” adds Tang.

“Rising production cost, inflation and more sustainable production methods will make production more expensive in the near future.”

“The production of exclusive wine requires a high degree of manual labor, which is why the general wage development will have a natural impact on wine prices,” elaborates the CEO of Jero. “If prices for future vintages increase due to higher production costs, one can expect previously released vintages to observe a price increase as well despite being produced under different conditions.

Main Risks Associated with Wine Investing

More exotic investments such as fine wine are characterized by lower liquidity than traditional financial markets or even other alternatives such as real estate. While this represents a significant downside for some investors, reduced liquidity can also insulate this type of investment from panic selling. “There is bigger liquidity risk compared to equities or other publicly traded securities,” says Tang. Although the sale processes are different in many ways, the timeline of selling a bottle of wine resembles an apartment or house sale, according to Tang. “If you want to sell today, you will not get the price you want. But if you have a little patience, you will get your price.”

“There is bigger liquidity risk compared to equities or other publicly traded securities. If you want to sell today, you will not get the price you want. But if you have a little patience, you will get your price.”

Lars Granat Jensen, meanwhile, argues that “it is not difficult to sell the best wines in the world, it is difficult to obtain them.” The success in wine investing, according to Jensen, hinges on “selecting the right wines for your portfolio.” Expertise, storage, fraud, insurance, and other aspects make wine a difficult to access asset class. Yet, RareWine Invest, Jero and perhaps other players provide a full range of services that can serve as an off-ramp investment program for wine investors.

“You do not need to be a wine expert to invest in wine. We handle the process from A to Z,” says Jensen of RareWine Invest. “We help investors select investment grade wine and build a portfolio with a certain risk diversification including well know wine areas such as Burgundy, Bordeaux, Champagne, Piedmont, Tuscany, Napa Vally and more,” he elaborates. “Besides building the portfolio, we also take care of logistics, insurance and storage at our own warehouse facility, Nordic Freeport, which is a bonded warehouse for wine and spirits located in the Denmark. Being a bonded warehouse means that the wine portfolio is stored without VAT and excise duties.”

Anders Tang’s Jero is on a mission to democratize the fine wine investment market by building a platform that enables wine reselling to private investors and wine lovers without the need of professional merchants. In addition, Jero is “delivering services throughout the investment process by seeking attractive investment opportunities (focus on smaller top-quality wine producers that are often lower priced and can deliver good returns), as well as taking care of import, insurance, storage, reporting and divestiture,” according to Tang. While there is a different set of risks associated with wine investing such as lower liquidity as well as storage or insurance costs, many investors will likely turn to wine investing for returns, low correlation, enjoyment and social currency.

 

This article features in HedgeNordic’s “Private Markets” publication.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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