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Hedge funds look at ‘exotic assets’ as risk diversification tool

Hedge funds look at ‘exotic assets’ as risk diversification tool
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First Published: Mon, Jul 16 2007. 12 28 AM IST
Updated: Mon, Jul 16 2007. 12 28 AM IST
Zelda Cheatle, a London photography gallery owner, is close to sealing one of her biggest and most peculiar deals. In late August, she expects to sell about 4,000 photographs in a single transaction, but the buyers will not be allowed to keep the works.
Cheatle manages a photography investment fund, set up by the hedge fund WMG in London, which had raised the money to buy the photographs, including Brassai’s of Pablo Picasso in his studio and Eve Arnold’s Malcolm X, from a handful of investors. WMG hopes the fund will make returns of as much as 50% over three years by buying and selling the art.
“With the right expertise and attitude, collecting photography is a good investment,” Cheatle, who spends all her time managing the fund, said while sifting through a stack of 1930s prints from Paris at WMG’s office in London.
As investors range far afield in search of places to put their money, hedge funds have expanded investments beyond stocks and bonds into art, wine, rare stamps and even soccer players.
Money managers have begun to look at these so-called exotic assets as way to diversify risk while searching for assets that may provide a cushion if the five-year market boom comes to an end. Critics, however, call them too risky and opaque.
The funds have begun to rely on the record year-end bonuses found on Wall Street and the inflow of new wealth from developing countries such as China and Russia to drive up demand and the prices of luxury items like wine, watches and violins. The expectation is that demand would continue even if the economy moves into a recession.
“There’s a new wealth that will not go away and that means for luxury cars, watches and wine, there will always be demand,” said Stephen Decani, a partner at Arch Financial Products, a firm in London that runs a fund investing in Bordeaux wines, which are among the most exclusive.
Michael Hall, the chief executive of the Stanley Gibbons Group, a coin, stamp and autograph collecting company that offers investment funds, considers his funds “a safe haven for cash”. “The stamp market didn’t budge a bit from 11 September,” Hall said.
Areas such as wine and art investing, previously reserved for the rich, are becoming more mainstream as pension funds and institutional investors look for ways to spread risk. Booming stock and credit markets have left asset managers and private equity firms flush with cash and hungry for new opportunities.
Yet, many large institutional investors balk at the risk, saying such investments are difficult to price and difficult to monitor. Stock or bond investors can track the value and the performance of their portfolios minute by minute while those buying into fine wines or soccer players have less visibility.
There are indexes tracking the price of wine, called Liv-ex, and one for art, Art Market Research, but they offer limited insight into how the markets move, tracking certain wines or artworks sold at certain auctions. One problem for investors, Hall said, is that they are largely at the mercy of the specialized fund managers.
“Would the average investor know that autographs by Robert de Niro are worth more than Tom Cruise’s because they are rarer? Probably not,” he said. The need of special knowledge raises the barrier of entry, keeping the size of the market small. For Jan Vilhelmsen, a partner at Absolute Return Partners in London, some level of transparency is a must. “We stop when we can’t get a good sense of how you price an asset,” he said.
Transparency may improve with time because it allows for a historic price and performance track record, but some managers, like Philip Hoffman, who runs the Fine Art Fund in London, disagree. At least art will never be as transparent as stocks, he said, because “every painting is different” and making high returns requires knowledge and market expertise.
Returns for investments in wine and art, the most established exotic investment types, have been strong. Prices for the 4,000 most popular artists, like Andy Warhol and Picasso, as tracked by Art Market Research increased 20% last year from a record in 2005 and gained 75% since 1988.
The Liv-ex 100 index of investment-grade wines, which is more than 90% weighted towards Bordeaux, rose 49% in 2006 after rising 18% the year before. A case of Château Latour brought £5,290 (Rs4,33780), or $10,700, at a Sotheby’s fine-wine auction in London in January, 5% more than at a similar auction in September.
“Demand from Asia, Korea, China and Japan, where wine is perceived as a status symbol, just like a Rolls-Royce or a Louis Vuitton bag, increased dramatically,” said Peter Lunzer, director of the Wine Investment Fund, a £10 million fund based in London. About half of that amount comes from private investors, and his five-year funds all have a plan to double their investments.
Yet, even if returns are bigger than those of stock funds, some analysts said they may be harder to realize because exotic markets remain small and less liquid. “The liquidity is difficult and means you may not be able to realize returns when you have to sell,” said Frances Hudson, global thematic strategist at Standard Life Investments in Edinburgh. “The illiquid nature of the investments can be problematic for some investors.” But investors may overlook that shortfall in exchange for some fun and a lively dinner party conversation.
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First Published: Mon, Jul 16 2007. 12 28 AM IST
More Topics: Money Matters | Global Markets |