Wine Fund Investing Without the Hangover

"Short of having a distribution network of your own and having a company of your own to sell these wines, it's not easy to get out of positions quickly," Clew (right) said in an interview with ThinkAdvisor. "You can't simply say 'I've got 1,000 cases of x, y, z wines, I want to get out of them right now' and call your broker and say, 'It's time to sell those things' and understand that the trade was done at 12:53 p.m."

Wine investments don't work like that, Clew explained. "You can sell things over time, and certainly you can get out of positions. But it requires time, number one. And, frankly, unless you're willing to take huge discounts to sort of prevailing market prices… a large position would require months to get out of."

Valuation Watch

Regulators in Luxembourg have instructed Nobles Crus to halt investor redemptions, but the fund's liquidity (or possible lack thereof) is not the underlying problem, according Clew. Last fall, news reports began questioning the fund's valuation methods.

Other wine-fund managers typically rely on publicly available Liv-ex prices, while Nobles Crus used its own method to value its portfolio.

Some of the fund's internal valuations were cited as being substantially above Liv-ex prices. These higher valuations helped the fund show consistently positive investment results despite overall lower prices in the fine wine market.

"I think the problem was that the world looked up and said 'These guys are marking what they own at just crazy prices,' " says Clew. "And, of course, the incentive was [there], because it was a fund structured kind of like a hedge fund. The managers were being compensated real time on whatever marks they were putting on the assets that they owned. So, they were overstating [prices], by most people's estimation. I guess you could charitably describe it as being very aggressive pricing …"

Alternative Approaches

Clew's says that his fund's private equity style format — in which investors commit for 10 years — avoids the liquidity mismatch.

The fund requires a minimum $250,000 investment and also owns its own distribution network. This business structure gives the fund immediate feedback on market prices and can help it generate business profits, even when wine prices are lower, according to the expert.

He also believe the fund's fee structure is more equitable to investors than hedge-fund style fees.

For wine investors seeking an alternative to funds, Clew says that do-it-yourself wine investing can still pay off. This approach also allows investors to drink their holdings, regardless of market prices.

Another option is to establish the equivalent of a separately managed account for fine wine. That gives the investor access to a wine advisor, who can provide market knowledge, vintage insights and buying power, while still allowing the investor to own their own wines.