Alternative investor guide: Can you make money on alcohol and paintings?

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By definition, an alternative investment is an investment in assets other than stocks, bonds and cash, making it a rather vast category. Nowadays, you can invest in virtually anything from gold bars and foreign currency to stamps and famous actors’ autographs. What was once considered a hobby, can now be a lucrative business

by Jacek Ciesnowski

Investors are always on the lookout for assets that could generate hefty returns, especially in times when stocks are underperforming. That’s why alternative investments have been around for centuries, although you could hardly call them “alternative.” Trading commodities such as silk or spices was the best way to raise fortunes centuries ago. One of the first investment bubbles dates back to 1637 when inflated prices of tulip bulbs suddenly collapsed.
shutterstock_20835934The popularity of such investments has been on the rise since the 2008 global stock crash. People who put most of their savings in stocks were looking for other ways to expand their investment portfolio. “Some 20 percent of retirement funds invest in alternative solutions, because such investments offer some counterbalance to securities.
They can also have higher return rates,” said Krzysztof Kamiński, member of the board at Millennium TFI investment fund.
The downside is that you usually have to freeze your assets for a longer period of time. “Investors should approach the [fine wine] market with an investment horizon of 5-7 years for optimum returns, however, some strategies we take can generate our target returns in a shorter time frame of 24-36 months. The underlying demand/supply imbalance that drives wine prices up over time does mean however, that the longer the investor is in the market the greater and less volatile the returns become,” said Philip Gearing, CEO of Cult Wines, a British company which plans on opening its Polish branch this spring.
“Traditional investments are regulated by a country’s financial supervisory authorities, units [such as shares or bonds] are being valued constantly and can be sold in a matter of seconds. With alternative investments, such as wine or art, it’s hard to verify who is on the other side of the deal, especially when we’re dealing with companies registered in such countries as the Caymans or Cyprus, the risk is greater,” Kamiński explained, adding that in order to exit such an investment, one needs to find a buyer first, which can take a significant amount of time.

Pretty pictures
The most popular form of such investments is probably art. Every so often, you can stumble upon a piece of news of another record-high transaction of a painting or sculpture, sparking the public’s interest in the market. But finding pieces of art that could be sold for millions is impossible, unless you already have millions to spend.
You can always be on the lookout for the next Picasso or Pollock, but it’s not easy. Without expert knowledge it’s hard to evaluate an artwork and trusting an expert can sometimes backfire.
A few years ago, auction house Abbey House signed exclusive contracts with several young Polish artists for their future works

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which were later put on sale at highly inflated prices. Paintings from Anna Szprynger were priced between PLN 20-35,000 while her previous works sold for PLN 400 and PLN 1,400. Independent art experts quickly saw the writing on the wall. After much controversy, Abbey House was sold (to Artnews) and has ditched its art trading branch, focusing now strictly on publishing. The aforementioned paintings are now being discounted by 80 percent.
Other risks concerning investing in art involve counterfeiting and lack of transparency. “Many transactions are done behind closed doors, between two collectors, very often prices are not publicized,” said Izabela Depczyk, publisher at Artnews, adding that prices are very often not driven by market but by emotions “People often buy something because they really want it, not because it is an investment for them.”
In Poland, according to various estimates, there are 50,000 people who collect and invest in art. “Collecting has never been a part of our culture, but that is changing. It has become very popular worldwide and Poles are following it,” Depczyk added.

Red turns green
While art is strictly market-driven by auctions, there are markets where prices are determined similarly to securities. Fine wines  are being traded on the London International Vintners Exchange (Liv-ex), founded in 1999 which provides monthly calculated indexes of the most sought after wines. For a long time, the benchmark Liv-ex Fine Wine 100 Index was hovering Zrzut ekranu 2015-03-05 o 16.02.58around 100 points. But around 2007, it started going up, sparking investor interest. At its high point in May 2011, it reached 360 points and soon thereafter fell to around 250, where it hovers around to this day.
What was behind such a rollercoaster? Greed and China’s fast growing elites who were buying cases at highly-inflated prices. “We could blame China, but sellers offloading products at much higher prices are to be blamed as well,” Krzysztof Maruszewski, CEO of Stilnovisti explained.
The reasons behind the Chinese thirst for fine wines were numerous. Its newly rich elites tried to emulate their Western counterparts. In 2008, Hong Kong abolished all taxes and duties on wines and wine became one of the most popular forms of bribery in China. But in 2011, after a few years of overspending on wines, the Chinese realized that they were overpaying for it. The tipping point was the 2010 Bordeaux futures (merchants are able to buy vintage still in barrel, 12-18 months before it’s bottled). But once the futures were made available to distributors and prices dropped instantly, many orders from China were canceled leaving wineries cash-strapped and desperate to move stock. That’s when the bubble burst.
And while some think that the best moment to invest in wines has already passed, others are hoping that the market will rebound. “In the H2 2014, we saw the main fine wine indices post consecutive monthly gains with the Liv-ex 50 reaching its highest point in the first 15 days of trading in 2015 since June 2014. This is an indication that the market has not only found a bottom, but prices have started to respond in a very positive manner,” said Gearing.

On the rocks
Recently, whisky has overtaken wine when it comes to being the investor’s alcohol of choice. The spirit’s popularity has skyrocketed. Over the last decade, exports of Scotch whisky have grown by 87 percent, more people are starting to treat it as an investment opportunity rather than a spirit. “People are looking for alternatives. Bank interests are at an all-time low, making deposits not so attractive. We’ve started our company as a financial advisor dealing with securities, but after the latest crash, we decided to look elsewhere and find a niche,” said Paweł Morozowicz from Wealth Solutions, a company which besides standard financial advisory offers investing in wine, art and whisky.
His company specializes in finding unique barrels and bottles. “We help our clients build a collection. They come to us, sayingZrzut ekranu 2015-03-05 o 16.03.40 that they have a specific amount they wish to invest in whisky. We then look for hard-to-find products which are valuable enough to be put in someone’s portfolio,” Suchocki explained. They either buy selected bottles at online auctions or buy whole barrels and bottle them with the help of carefully selected companies which specialize in such processes, which is just as important an aspect as the distillery which produced the whisky. “ Each distillery has its own specification and distinct tasting notes. Even with old products of high quality, if the distillery doesn’t have a proven track record its products won’t increase in value as fast as renowned producers’ spirits,” Suchocki explained.
His company works hard to find unique whiskys all over the world. Sometimes they just get lucky. “Two years ago we bought a barrel from the closed down Karuizawa distillery. We had to use our personal connections to get a hold of it. Still, if everyone knew how popular and expensive the distillery would become over that period, no one would have sold it to us,” Suchocki explained. So far, Wealth Solutions has imported three, very limited whiskys for its clients, the first one has increased over 70 percent in value over the course of two years.

Barrels vs bottles
While Wealth Solutions is dealing with very old and very unique bottles, which are sold at auctions, not unlike paintings, Stilnovisti has a different approach, opting to invest in newly-filled barrels instead of old bottles. “If someone can spend £5,000 for a single bottle, he can surely spend a couple thousand for a barrel from which 300 bottles can be made. We’re interested in the consumer market, not a collectors’ one,” said Maruszewski. He explained that since there is more and more whisky being made and sold, the barrels will be hot property after three years (which is how long the spirit needs to mature in order to be called whisky) and distilleries will spend a pretty penny to acquire them to use in their production. “Blended whisky makes up 95 percent of the whisky market, that’s where the companies make money and will need top quality ingredients to keep making their products,” Maruszewski explained. His company is getting distillate thanks to existing deals signed before the production skyrocketed, but he’s not afraid that once the contracts expire, he will be left with nothing. “If producers stopped selling their distillate it would make the one our customers already own even more expensive. But I don’t expect all manufacturers to stop selling it after the current deals run out,” Maruszewski said, explaining that right now a fresh-filled barrel costs about £2,000 while a three-year old one is worth £4,000 and according to Maruszewski there is a shortage of new barrels on the market. “All distilleries are now working overtime. There’s little room to increase production and to set up a new production line, the waiting list for proper equipment is three years.”
After distillate turns into whisky, the investor has a few options. Sell the barrel to the distillery, bottle it and sell it under his brand or wait even longer for it to mature. The old barrels are quickly disappearing from the market. According to the Scotch Whisky Association, only 13 percent of currently stored whisky has matured 13 years or more and with the current volume of production such stock will disappear in four years.

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