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Other - AUGUST 1, 2019

Fine wine less volatile than other alternative investments

by Andrea Zander

Fine wines have proven to be less volatile than other major alternative investments, and offer superior risk-adjusted returns as part of traditionally diversified portfolio, according to a new report by wine investment management specialist Cult Wines.

The Alternative Investment Report 2019 benchmarks the financial performance of fine wine against a range of alternative investments including hedge funds, real estate, commodities and fine art. As a tangible asset sharing many of its characteristics with major alternatives and uncorrelated with the core financial markets, fine wine was shown to be a very attractive investment option.

Between 2015 and 2018, a portfolio that included fine wine as an alternative asset would have delivered a higher risk-adjusted return of 8.63 percent when compared with one that did not include fine wine. When both hedge funds and fine wine were included as part of a portfolio comprising multiple alternatives, the Sharpe ratio more than doubled from 0.4 to 0.93, making it the best portfolio for risk-adjusted returns. The return for this portfolio increased to 8.20 percent versus 5.05 percent for a traditional portfolio.

Over a 10-year time horizon, the risk-adjusted return remained the highest at 8.88 percent for the portfolio including fine wine as the only alternative asset. Comparatively, the Sharpe ratio for the portfolio, including both fine wine and hedge funds, stood at 0.77 with a risk-adjusted return of 8.40 percent. A Sharpe ratio of 0.75 and return of 9.00 percent could have been achieved when including both real estate and fine wine as alternatives within a portfolio.

While most alternatives performed negatively in 2018, fine wine performed strongly and delivered a return of 9.2 percent. By comparison, commodities and hedge funds delivered returns of –13.8 percent and –4.8 percent, respectively.

Fine wine outperformed both the S&P 500 Index and commodities during the equity market downturn of 2008, demonstrating that fine wine, as an asset class, provides diversification, reduces risk and increases returns. In an investment context, the lower the correlation to other asset classes, the higher the diversification benefits an asset offers. Correlation between commodities and equities has varied dramatically over the past 10 years, ranging from 0.34 to 0.61, whereas fine wine’s correlation is consistently low, between 0.09 and 0.12, suggesting fine wine can provide very effective diversification benefits for investors.

To read the report, click here.

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