By Ellen Kelleher Financial Times

It is difficult to turn a profit on bottles of bordeaux and burgundy when the outlook for sought-after vintages looks bleak at best. And it is more challenging still if you run an open-ended wine fund, as evidence emerges that this niche investment sector is floundering.

Just ask Andrew Davison, founder of the Vintage Wine fund, a Cayman-based investment vehicle once boasting as much as €110m in assets at its 2008 peak. It is to be wound down at the end of the month after being hit by dismal performance, forced sales and a spate of redemptions.

“The wine market is dead. It could take years for this market to recover,” says Mr Davison. “I think you have to ask whether open-ended structures are suitable for these sorts of illiquid investments. There’s also a danger that wine funds can get too big. When you allow investors to come in and exit on a regular basis, you get huge outflows when things go bad.”

The closure of one of Europe’s oldest wine funds is not a lone example of why gaining exposure to this sector can turn into a cautionary tale.

The industry took another hit this month when the UK’s Financial Conduct Authority announced that wine funds listed in London – which are unregulated collective investment schemes – must not be marketed to retail investors of limited means.

The demise of the Vintage Wine fund also comes as the Luxembourg financial regulator is forcing Nobles Crus, once the world’s largest registered wine fund worth as much as €109m, to bar its investors from withdrawing their money. It can no longer sell its shares after running out of cash.

The decision by the Commission de Surveillance du Secteur Financier to “temporarily suspend all redemptions and subscriptions” in Nobles Crus came late last month after Elite Advisers, the fund’s managers, admitted they did not have enough cash to meet redemptions.

The fund revealed the news in a letter sent to investors.

“Nobles Crus now finds itself confronted with a few requests from large institutional investors for redemptions involving considerable sums of money,” wrote Miriam Wilson and Michel Tamisier, general partners at Elite Advisers in a letter dated May 31. “Currently, Nobles Crus does not have the necessary liquidity to honour these requests.”

The gating of the fund follows a long spell of criticism of its practices. The valuation system Nobles Crus employs continues to come under attack from other wine fund managers, who tend to rely on Liv-ex prices as a benchmark for their portfolios, but have not reported consistently strong returns.

Rather controversially, the managers of Nobles Crus opt not to use Liv-ex. Their reasoning is that its coverage of the rarer vintages in which they invest is “patchy and inconsistent”.

Andrew della Casa, director of the $55m Wine Investment fund, which only invests in bordeaux, adamantly disagrees with the decision: “We do believe the best practice is to use Liv-ex. If Liv-ex isn’t covering your stocks, then they aren’t liquid enough to be considered in the portfolio.”

While many wine funds took a beating in recent years, especially after the Chinese pulled out of bordeaux in 2011, the Nobles Crus fund, which launched with just €2m in assets at the start of 2008, did not. In 2008, the fund returned 20.4 per cent; in 2010, 13.4 per cent; And in 2012, the fund returned 8 per cent despite meeting millions of euros in redemptions.

Envious rivals argue that most of the fund’s profits have come from unrealised accounting gains on inventory, not from actual sales of wine. They say that a number of the bottles in the Nobles Crus portfolio are freely available at cheaper prices elsewhere.

Mr Tamisier vigorously defends the fund’s valuation methods.

“Our 2001 valuation of Cheval Blanc 2000 included observed market prices from the UK of €789 per bottle, but up to €1,525 per bottle from a Hong Kong auction house,” he told FTfm.

Wine funds remain exclusive. There are no more than 20 registered, with most concentrated in Europe and a select few in Asia and the US. Even the most established have not been in existence for more than 10 years.

Justin Gibbs, co-founder of Liv-ex, says: “Wine funds are still a game in their infancy.”

But the market holds appeal, especially for wealthy Chinese, who just a few years ago were responsible for driving the price of fine French wines to record highs.

According to Mr Gibbs, the performance of wine, which is worth about £6bn per year as a global market, has been “very lacklustre” since June 2011, when the market turned after a strong two-year run. The best bordeaux vintages tend to fare better than burgundy, but on the whole the market remains weak.

In a note to investors, Mr della Casa, described last year’s en primeur season, which involves purchasing wine while a vintage is still in a barrel, as “generally disappointing”.

He blamed poor sales on the high release prices French chateaux demand.

Mouton Rothschild emerged as the strongest of the young wines, with price increases of around 1.5 per cent on average across vintages. Château Margaux was up a bit as well, while Château Lafite was broadly flat.

For more on this story go to:

http://www.ft.com/intl/cms/s/0/9017dcfa-d27e-11e2-aac2-00144feab7de.html#axzz2WNdhs682