Charles Paikert, Family Wealth Contributing Editor in New York City

Thinking of investing in wine, fine art or rare stringed instruments?

If so, and if you were in Manhattan on Tuesday night, The New York Hedge Fund Roundtable seminar on “Alternative Alternative Investments” at the Princeton Club was the place to be.

Indeed, despite the muggy weather in the middle of the “dog days” of summer, the seminar attracted a capacity crowd of curious financial professionals, underscoring the surging interest in alternatives in this anti-equity era, no matter how obscure, illiquid or opaque the asset class may be.

And make no mistake: no one confused the market for wine, art or stringed instruments for the New York Stock Exchange. Even the panelists at the seminar, all top executives of funds investing in those asset classes, conceded that their specialized markets were fraught with risk and not for everyone.

The art market, the audience learned, is the world’s oldest unregulated – make that very unregulated – market. Most of the $10 billion in annual sales are private, sales of fake paintings are not uncommon, and while the market is global and broad it is also small, secretive and “runs on gossip,” according to Morgan Long, director of art investments for The Fine Art Fund Group.

The market for investment grade wine is highly inefficient and “not yet developed,” said Timothy Clew, co-managing partner for TWT Investment Partners. What’s more, the market remains small, under-capitalized, burdened by complex regulations and lacking in real time market data, Clew added.

Without a doubt, the market for rare stringed instruments, such as centuries old Stradivarius violins, is tiny, highly illiquid, highly specialized and – in what had to be the understatement of the evening – “not known by everyone,” as Anthony Finley, partner in the Artist Rare Instrument Fund, put it. As for transparency, there are “not many public transactions” when it comes to sales, Finley said.

Turning risks into rewards

But those same risks also are successfully exploited for substantial gain, the executives pointed out.

The Fine Art Fund Group’s longstanding expertise and connections in the byzantine art world enable it to make profitable investments that would be difficult for outsiders to duplicate, Long said. And she noted that aside from a relatively brief slump after the 2008 financial crisis, the art market has seen consistently higher prices especially at the high end, as exemplified by the recent world record sale of Edvard Munch’s painting “The Scream” for $120 million at auction earlier this year.

Similarly, the very inefficiencies that characterize the market for fine wine are also areas of opportunity that the experts at TWT “try to take advantage of,” Clew said. The gross annual return on investment grade wine has averaged from 8 per cent to 10 per cent, according to Clew. And the wine market keeps growing as the middle class in developing countries expands, he added, increasing demand for a limited supply.

The market for rare stringed instruments may be miniscule, but prices for particularly prized pieces have soared, Finley said. Many instruments have doubled in value over the past five years while appreciation for some extremely rare pieces has been even more spectacular over the long term, he asserted. The “Lady Blunt” Stradivarius violin, for example, sold for $200,000 in 1971, $10 million in 2007 and $16 million last year, according to Finley.

In addition, art, wine and stringed instruments share a number of traits with other alternative investments, the executives claimed, including being non-correlated to the equity markets, rising in value faster than other asset classes and providing investors with a proven hedging strategy.

What’s more, art, wine and violins have all been buoyed by rising demand from China. Indeed, Long pointed out, last year for the fist time more art was sold in China than in the US.

Personal passions

But the appeal of “alternative alternatives” goes beyond just return on investment, said Steve McCarthy, senior vice president for KCG Capital Advisors, who moderated the panel.

“These are what I call PPIs – personal passion investments,” McCarthy said. “You wouldn’t devote more than 5 per cent of your portfolio to them and they don’t replace traditional asset classes. But they’re appealing because people care about them and feel a personal connection with them.”

The fund executives agreed. In fact, Finley said investors in the Artist Rare Instrument Fund often play music themselves and are encouraged to meet and get to know the famous musicians who may be playing a rare, centuries-old violin or cello that the fund has invested in.

Mixed reactions

The financial professionals in the audience appeared to be both impressed by and skeptical of the presentations.

The “level of interest” in the asset classes was eye-opening, said David Bigelow, senior advisor at New Oak Capital in New York. But he also worried that a “worst case scenario” event, such as a natural disaster destroying a wine crop, could be catastrophic for such specialized markets.

Frank Byrne, managing partner for BC Global Investing, a New York-based asset manager said he was impressed by the discipline the funds applied to their markets and their potential to take advantage of inefficiencies.

But Byrne also expressed concerned with the lack of transparency surrounding the private sales so prevalent in these super-specialized markets. “You want to know you’re getting the best price when you sell,” he said. “But if it’s a private sale, how do you know you’re getting the best execution?”

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