Diversification Benefit of Actual Investing in Fine Wine

Abstract

This paper examines the meaningfulness of fine wine as an alternative investment, with particular focus on the costs of investing in fine wine. Is fine wine suitable for further diversifying and thus improving the risk-return profile of portfolios invested in global equities and bonds? This analysis takes place in an initial stage on an index basis and in a second stage on the basis of real investment opportunities. The inclusion of fine wine leads—at an index level—to only a slight improvement of the annualised return, but to a marked increase in risk. When costs are considered, all portfolios including fine wine exhibit a worsening of the Sharpe ratio. This result is a significantly more critical verdict on this diversification opportunity than was noted in the previous studies. By contrast, the results confirm the studies which point out the high costs of investment in fine wine.

TOPIC: Real assets/alternative investments/private equity

Key Findings

• • Looking at the period from 2004 to 2018 the diversification benefit of investing in a Fine Wine Index can hardly be observed.

• • The cost of actually investing in Fine Wine does have a negative effect on the diversification benefit.

• • Due to the establishment of the Liv-ex fine wine exchange, the costs of investing in Fine Wine have been considerably reduced.