Investing in Wine: Sour Grapes or Liquid Gold?

Exploring wine as an investment option.

Exploring wine as an investment option
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When reviewing their portfolios, many investors will instinctively reach for a glass of wine if their holdings have taken a hit. But in recent years, wine has proven to be more than just an antidote for investment-related blues. Instead, it is increasingly becoming an investment in and of itself.

Wine investments have existed for quite some time. Perhaps the most rudimentary example is the private wine purchaser who buys a bottle, sticks it on a shelf and resells it at a profit after it ages. From that model, which has existed for centuries, the concept of the wine fund emerged. The idea is simple: Investors pool their money and entrust it to a fund manager. The manager then purchases wine on behalf of the investors and looks to resell it. Any profits are then reinvested in more wine or returned to the shareholders.

[See: The 10 Strangest Mutual Funds.]

There are many permutations of this basic model, but one of the more interesting versions is the fund that invests not in wine but in wine-related real estate. Take, for instance, the Blue Chip Winery Fund, which is based in the Bahamas and uses its investments to buy stakes in vineyards and wineries in Europe and Canada.

Although wine investors could once expect to squeeze promising returns from their grapes, the market has cooled down quite a bit in recent years. The bad news for the industry is exemplified by the Vintage Wine Fund. According to the Financial Times, the fund, which once had more than $100 million in assets under management, is preparing to liquidate due to disappointing performance.

[Read: Are Alternative Funds Too Risky?]

Nonetheless, for investors who are optimistic about wine as an investment, there are still plenty of options. The key, of course, is to understand the risks.

Perhaps the biggest risk is that wine, somewhat ironically, is an investment that is prone to liquidity problems. Rare bottles may command high market values, but none of that matters unless someone is willing to buy them for what they're worth. "The issue with [wine] funds is always your exit strategy," says Sergio Esposito, who co-manages the Bottled Asset Fund, a fund that specializes in Italian wines. "Knowing how to sell ... is extremely important."

By a similar token, wine is often hard to value. Particularly for the most expensive wines, value is tied more to whatever a particular buyer is willing to pay than it is to objective indicators. "Wine is a unique product, much like art is a unique product. It's all in the eyes of the beholder," says Jeff Stevenson, the president and CEO of the company VinoPRO, a company that helps wine producers sell their products. "Trying to figure out how [a wine fund] is going to pay out ... is like rolling the dice."

Another risk is that wine funds are often based abroad and frequently follow a private equity structure, which means there are fewer regulatory assurances than there are with the heavily regulated domestic mutual fund market.

[See: Risky Business: 7 Mutual Funds for Gamblers.]

Given the risks, most people who put money into wine funds are high-net-worth investors. Indeed, most funds have limitations that effectively ensure only wealthy investors can participate. Esposito's fund, for instance, has a minimum investment of $50,000, which is fairly common among wine funds.

Although a number of wine funds have been struggling, Esposito, whose fund is projected to earn investors an annualized return of around 35 percent (net of fees) over the course of its life span, still sees plenty of opportunities, particularly in the Italian wine market. "[Italian] wines are getting more and more recognition every day," he says.