Are wine investment funds good investments?

[Howard_Cooper]

I just read the fine print for Vinculum:

No liquidity:
5 years, locked for 2 years and subject to a redemption fee of 5% before the 5th anniversary of the date of subscription.
Written notice must be received at least 90 days prior to the applicable redemption date.

Placement Fee (taken off the top, before any money is invested):
7.5% of subscription amount

Management Fee:
2% (0.5% payable on the last business day of each calendar quarter).

Performance Fee (management’s share of profits):
20% of net returns above the high-water mark

On top of that, “The Fund employs Wine-Searcher as an independent valuation agent. Other agencies may be employed to verify results.” So if there are absurd asking prices on W-S, that could result in inflated values (and hence management fees).

So they value prices at retail (Wine Searcher) but do they get retail when they sell the wine?

[John_Morris]

Where do they buy at the cellar door? Not Bordeaux or Burgundy?

I’m pretty sure some do, but reading the fine print on the websites of these two, it seems they buy from intermediaries.

How are you sure. I understand it’s not possible in Bordeaux (for ‘investment grade’ wines) and I don’t see many top Burgundy producers kicking out long-standing customers for them.

It seems I was wrong. I’ve been informed that the fund manager I met purchased at wholesale.

[Marcu_Stanley]

Are your price indices based on buying prices or selling prices (the difference, of course, being middlemen costs - retailers, auction houses, etc.)?

Hi Howard - Liv-ex operates a b2b fine wine exchange - in order to be a member you must be a fine wine business (retailer, wholesaler, importer, merchant, negociant, fund), the prices are therefore wholesale trade prices and thus there are no middlemen. Like any exchange, Liv-ex operates as the central counterparty.

The question of how Liv-ex sets up its price indices is rather different than the question of the prices that the funds can realize if they actually had to sell their wines. Odd batches of back vintages might not be able to attain wholesale trade prices, especially if funds are seeking to unload a lot of them. Cases of Bordeaux first growths held in bond since futures? Probably yes so long as there was not a ton of selling pressure.

[p_raghib]

delete

[GregT]

Two posts up he corrected himself.

[Brett_O]

Illiquid investment, high fees, questionable valuations, shrinkage risk…what could go wrong?!

[DougS]

I just read the fine print for Vinculum:

No liquidity:
5 years, locked for 2 years and subject to a redemption fee of 5% before the 5th anniversary of the date of subscription.
Written notice must be received at least 90 days prior to the applicable redemption date.

Placement Fee (taken off the top, before any money is invested):
7.5% of subscription amount

Management Fee:
2% (0.5% payable on the last business day of each calendar quarter).

Performance Fee (management’s share of profits):
20% of net returns above the high-water mark

On top of that, “The Fund employs Wine-Searcher as an independent valuation agent. Other agencies may be employed to verify results.” So if there are absurd asking prices on W-S, that could result in inflated values (and hence management fees).

That makes the whole thing sound like a total scam.

[John_S]

Fwiw, there are countless bad and non investor friendly investments but that is way different than a scam.

[Yao_C]

Good lord 2 and 20 with a 7.5% placement fee on top. SMH

Can we get Victor in this thread?

[Tom_Reddick]

Good lord 2 and 20 with a 7.5% placement fee on top. SMH

Can we get Victor in this thread?

If he thinks he can get the same deal, he is probably too busy writing a business plan to reply.

[DougS]

Fwiw, there are countless bad and non investor friendly investments but that is way different than a scam.

Valuing assets with numbers that are definitely not close to what those assets could be sold for, and charging fees based on those numbers? I’d call that a scam.

[John_S]

Doug, so any private equity, venture capital and a myriad of similar vehicles fit that bill.

No i do not generally buy that type of investment but certainly investors should understand the risks.

[Yao_C]

Hm I think there’s a misunderstanding here. I have not read the fund docs but I would be shocked if fees were charged on NAV (i.e. current asset value of portfolio) as opposed to AUM (i.e. amounts invested), which is standard

[Russell_Faulkner]

Hedge fund model, fees on Nav with a high watermark.

[John_S]

Yes pretty much your typical Hedge Fund structure.Certainly on the high side. Placement fees I do not often see but I always saw the institutional market and the above sounds retail HF like.

Again, IMHO, a poor investment and vehicle but not a “scam” by any current legal definition. Now if the valuation agent was the fund manager (or related to) that is when things get really dicey. That certainly can be a scam, aka Madoff and countless others.

[J_a_y_H_a_c_k]

Love the collective puns above. This glass of investments. No liquidity.

My gut tells me that it’s a bad investment and it ruins the hobby. How can you drink it if your focus is on increase in value.

[DougS]

Doug, so any private equity, venture capital and a myriad of similar vehicles fit that bill.

No i do not generally buy that type of investment but certainly investors should understand the risks.

Okay, fair enough. I have zero knowledge of the financial world and you obviously know what you’re talking about. Still, it does seem like a deceptive way of doing things, even if it’s not uncommon.

[John_Morris]

Doug, so any private equity, venture capital and a myriad of similar vehicles fit that bill.

No i do not generally buy that type of investment but certainly investors should understand the risks.

Most PE and VC funds charge fees based on the capital raised, not any later appraised values. Hedge funds can charge based on current value because they typically invest in marketable securities.

[John_S]

Yes, I agree John M. above is correct. I was not clear above on that valuation difference.

Doug, for sure that fee structure can leave a bad taste in anyone’s mouth who knows about investment vehicles and some common pitfalls. The issue is always is the risk/reward proposition worth it after including that stuff. Very often not. That fee structure generally works better for the fund manager that investors but certainly not always. Large institutions who are active in that space pay much less.

[John_Morris]

I would add that PE and VC firms have a lot of investment-related costs – due diligence going into investments, transaction costs (bankers and lawyers) and ongoing, active oversight of their companies – that hedge and wine funds don’t have. With wine funds, the storage is the only significant cost after the money is invested.