Alternative assets are a mainstay of family office investing, accounting for as much as 50% of an average portfolio, which is dominated by private equity (see page 7), real estate and hedge funds. As family offices — and a rapidly expanding institutional investor base — clamber to acquire assets that capture growth and income, the surge in demand has spawned a spate of alternative investments funds, with esoteric and out-of-the-box investment themes in luxury markets like vintage guitars, classic cars, rare violins, even truffles.
The move into these embryonic asset classes is due, in part, to constructing a well-diversified portfolio by moving into a broad range of investments. Low correlation with other financial assets is certainly an attractive strategy, as is the fact that irreplaceable tangible assets can exhibit defensive characteristics during weak economic periods.
Many are set up as private funds that let investors pool their money to buy portfolios of assets and often charge hedge fund-like fees of 1%-2% of assets and 20% of gains. Money is locked up for at least five years which makes these assets poor choices for short-term investors but better-suited to more long-term orientated investors, such as family offices.
Furthermore, analysts argue that a long-term horizon helps reduce concerns about illiquidity and volatility. This is arguably the most important consideration since many of the alternative investments — termed treasure assets or passion investments — are also relatively illiquid, thus hard to sell quickly and some inherently speculative.
Nonetheless, investing in treasure assets seems perfectly reasonable to those who enjoy it and have a certain expertise, making investment a more personal and fun process. Those who invest in ‘alternative alternatives’ seem to have a greater interest and fascination in what they are purchasing, resulting in aesthetic, as well as, financial returns.
This perception is borne out in the Capgemini and Merrill Lynch World Wealth Report 2010 findings that high-net-worth individuals were investing more in objects of passion as “investor-collectors” and seeking out those items perceived to have tangible long-term value.
Classic cars
The classic car funds are the latest in a number of specialist investment vehicles to have been launched within the last five years in a bid to capitalise on investor demand for collectible assets, with the aim to procure a number of high-echelon collector cars and sell them for capital gain.
Two appeared in 2011, the IGA Classic Car Fund and The Classic Car Fund launched by independent multi-client family office The Count of Custoza Family Office in Zurich. The Ultimate Classic Car Fund and The Family Classic Cars Fund I launched in the United States in 2013, while PHD Equity Partners revealed its Classic Car Fund in May 2014. The market seems to be revving up with more on the horizon from Rolling Art Advisors and the Passion Investors Classic Car Fund.
These funds are designed with the enthusiast in mind and the fact that not everybody is equipped financially to just start collecting at the high-end. Structures can range from the purchase of sports and luxury models to classic cars of different years and makes. Generally, cars that embody style, performance, historical significance, rarity and competition history are truly desirable, however such cars are very, very limited.
Each fund has particular nuances from being able to own a piece of each car in the fund, occasionally drive the cars, or own shares in the operating company that services, restores and stores cars. In some jurisdictions, like the UK, returns are exempt from capital gains tax if the car was specifically bought for investment, rather than trade.
Protagonists state that classic cars have a low to negative correlation to alternative asset classes and that investing in classic cars provides portfolio diversification and a defence to cyclical risks. The classic car market is often affected by appearance, image, scarcity, history and condition as much as the mechanical aspects of the car and even whether it is any good to drive.
Sound investments
Musical instruments are also viewed as a low correlated collectible asset class and the price history of rare stringed instruments suggests the best returns occur over longer periods. An increasing number of family offices, high-net-worth investors and advisors are viewing musical investments as long-term stores of value. To satisfy this demand, there are also funds enabling ownership of a portfolio of fine and rare musical instruments ranging from pricey violins to vintage guitars.
The strategies employed by funds differ greatly and the type of instruments in which funds invest vary, but most have five- to ten-year investment horizons and employ strategies designed to lessen the effects of the general illiquidity of the assets.
For instance, the Artist Rare Instrument Fund buys shares in musicians’ best violins and cellos in exchange for the artist agreeing to sell part of their equity in the strings to the hedge fund. Target investments include top quality rare Italian violins, violas and cellos created by Antonio Stradivarius, Giuseppe Guarnerius del Gesu and other top makers from the 17th and 18th centuries. However, one vehicle, the Fine Violins Fund of pre-nineteenth century Italian violins, has reportedly been abandoned due, in part, to the compliance burden.
In another part of the stringed market is Anchorage Capital Investment Management’s fund of vintage guitars: specific models of acoustic and electric guitars by US manufacturers, such as Gibson, Fender or Martin, produced between 1920 and 1970.
Blue-chip guitars can range in price from $25,000 to $600,000, though iconic guitars, such as John Lennon’s J-160E guitar sold for $2.14m in November 2015, while Bob Dylan’s Fender Stratocaster from his famous electric performance at the 1965 Newport Folk Festival sold for $965,000 in December 2013.
Whereas a Stradivari string instrument goes for millions: the 1721 Lady Blunt violin sold for $16 million in 2011 and the minimum bid for the Macdonald viola sold in a Sotheby’s sealed bid auction in 2014 was an astronomical $45 million.
Gourmet funds
Culinary enthusiasts will expound the delights of truffles, one of the world’s most expensive foods. But, for some, truffles are also an investment opportunity, especially with medium-to-large premium white truffles retailing for €2,500 (£1,752) a kilogramme in November 2015, compared with €1,500 (£1,051) in 2014. Details are scarce but LuxeFund is understood to have had a Truffles Investment Fund.
Then there are firms selling shares of global truffière groves. Chile-based Sembrador Capital has a novel approach with its venture capital fund that invests in new seeds of truffles, amongst other crops. One of the firm’s investments has been a truffle farm in Mulchén, Chile.
These investments of passion can be considered a generational wealth management tool because the lack of liquidity is not going to allow trading in and out. For many though, the worlds of collecting and investing are converging and the lure is simply the fun and marvel of owning an iconic asset. n