With equity markets near all-time highs, market volatility increasing, and inflation rising, investors’ quest for alternative sources of return and risk reduction remains unabated. Global alternative assets under management have topped US$10 trillion, according to Preqin, a leading data provider to the alternative asset community. Their recent survey found that 72 percent of institutional investors are looking to increase commitments to alternatives, particularly in infrastructure (51 percent), venture capital (43 percent), private equity (43 percent), and private debt (39 percent).

CFA Institute lists private equity, hedge funds, real assets, commercial real estate, and private credit as alternative assets in the 2022 curriculum,  but recent growth and product innovation have expanded this set considerably.

Recent growth in the alternative space has been spurred by demand from high-net-worth and retail investors. As necessity is the mother of invention, alternative asset managers have responded with innovative solutions providing exposure to crypto currency, digital assets, sustainable investing, and a range of other co-investment and private equity opportunities. The 2021 EY Global Alternative Fund Survey notes that “flexibility in product and fund structures has offered opportunities for investors to take advantage of market disruptions in several areas, including private company investing” (p. 4). A study conducted by Fidelity Digital Assets in September 2021 found that more than half of the 1,100 high-net-worth and institutional investors surveyed already owned digital assets, with family offices and financial advisors leading in their adoption.

Alternative ventures for elite investors

In the ultra-high-net-worth space, diversification opportunities span an entirely different set of luxury collectibles, or passion assets. These items are coveted not only for their investment potential, but also for offering long-term wealth preservation away from public markets, while simultaneously providing the benefit of current lifestyle enhancement.

Knight Frank, a global real estate consultancy located in the UK, conducts extensive research into the global real estate market, identifying trends and opportunities in the luxury and commercial property sectors. The work-from-home phenomenon has had significant impacts on the value and income-producing potential of country homes and vacation properties such as ski chalets in the French and Swiss Alps. Knight Frank is also currently pointing to several nascent alternative real estate opportunities for private investors, including regenerative agriculture, older offices, trailer parks, and studio space.

The Knight Frank Luxury Investment Index (KFLII) tracks the capital value of a theoretical basket of selected collectable asset classes—including art, classic cars, coins, coloured diamonds, furniture, handbags, jewelry, watches, fine wine, and rare whisky—using existing third-party indices.^[1]

Inebriant investments

While many of the assets in the luxury goods index remain out of reach of retail investors, recent developments in the investment-grade wine category have brought the benefits of this asset to a much broader group of investors. Cult Wine Investment, the global leader in fine wine collection and investment management, recently launched a North American division headed by CEO Atul Tiwari. “Historically, the wine investment category has been perceived as only for the wealthy, or those with considerable wine knowledge,” says Atul, “We know that is not the case and are enabling more people to invest effectively” (p. 1).^[2]

Beyond strong long-term returns, fine wine has delivered the investment merits most sought-after by alternative asset investors: low volatility, low correlation to other assets, and a hedge against inflation.

Cult Wines demonstrates that fine wine has historically functioned as a safe haven during periods of market turbulence. For example, during the 2008 global financial crisis, the S&P 500 declined 38.5 percent, while the Liv-ex 1000 index fell only 0.6 percent (December 31, 2007, to December 31, 2008). At the beginning of the COVID‑19 pandemic, the S&P 500 declined more than 23 percent, whereas the Liv-ex 1000 declined by only 4 percent (January 1, 2020, to March 21, 2020). The ten-year annualized standard deviation of the Live-ex 1000 for the period ending November 30, 2021, is 3.74 percent, compared to 13.03 percent for the S&P 500 and 15.31 percent for gold.

Historically, fine wine has shown low correlations to traditional asset classes such as equities, bonds, and gold.

Low Correlations with Liv-Ex 1000 (as of November 30, 2021)

Source: Cult Wine Investment, citing S&P Global Market Intelligence^[3]

Cult Wine notes that, as an inflation hedge, the primary drivers of fine wine prices are internal factors, including supply and demand, wine quality, and brand prestige, which makes them less susceptible than other financial assets to changes in inflation or the wider economic outlook. In addition, supply levels are constrained, creating a scarcity element that can help keep price performance consistent and above the rate of inflation.^[4] Of course, as a passion asset, an investor can also periodically enjoy their wine investment, knowing that consumption of the world’s limited supply of fine wine only contributes to its scarcity factor.

Conclusion

Fuelled by investor demand and the ingenuity of asset managers and entrepreneurs, opportunities in the alternative investment space continue to proliferate and become available to a broader spectrum of investors. While only time will reveal the diversification merits of some of these options, all are a testament to the genius and innovation of the investment profession in its quest for portfolio optimization.