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Financial managers rarely consider asset classes Passion Investment as a baseline for placement of funds entrusted to them, because their market small-transparent, difficult to understand and highly illiquid. Yet today there is an apparent rise in interest in such investment funds that can offer a very fruitful investment strategies, particularly in the current economic conditions.

To the extent that in recent years throughout the world wealthiest people showed a growing interest in investing in alternative assets such as art, wine collection, rare books, stamps, musical instruments and memorabilia connected with the names of celebrities - so-called Passion Investment («investments of passion"), and increased number of investment funds that specialize in these unique assets.

In the Fine Art Wealth Management we first began to study and analyze these specialized investment funds in 2003 to fill the lack of information about them and their activities in the interests of asset managers and private clients. Today we see the number of funds that specialize in Passion Investment, is constantly growing. As the findings of research Merrill Lynch / CapGemini World Wealth Report 2008, in 2007 worldwide, and owners of Ultra-rich individual investors have invested a significant portion of their states in this segment of the investment market. In 2007, the most popular categories of assets have become collector's items are a luxury (this includes expensive cars, yachts, private planes) and visual arts - they accounted for respectively 16.2% and 15.9% of the total market volume Passion Investment and the third place was taken by investing in jewelry - 13,5%. Significant impact on the global market for luxury goods had secured investors from emerging economies, even the second half of 2007, when the U.S. had already begun to gain momentum the financial crisis.

Why "investments of passion"

There are many precedents where objects of fine art, collectibles and other asset classes Passion Investment becomes a kind of refuge for investors in times of economic uncertainty. The worse news is better for new collectors and sellers - and it was not for a very long time. During such periods, not only begins with the flight of capital stock sites, but the economic uncertainty prompts investors to investment in the arts and other subjects related to this segment of the investment market, which in other circumstances might never have changed the owner.

Today, as before in moments of the collapse of stock markets, certain sectors Passion Investment can become an investor in the safe harbor. Indeed, many collectible items rose in price during the Great Depression. Coins and other collectibles have risen in price very seriously, and during the oil crisis of 1979. After the stock market crash in October 1987, Dow Jones Industrial index took 15 months to reach the pre-crisis levels, while investors sold off stocks, investing the funds thus received in the art. In 2000, when the combined losses of investors in the stock market amounted to about $ 3 trillion, artmarket not lost one iota. Index Mei / Moses Fine Art Index, which reflects the average value of auction prices for art in 2000, added 16%.

While it is certainly true that the prices at auctions Christie's and Sotheby's in Europe, U.S., Asia and the Middle East in recent years were lower than expected because of the global financial crisis, the decline has been mainly art of the postwar period. It should be borne in mind that this sector of the art market more than others won thanks to an increase in the number of wealthy people around the world in recent years. If the source of new capital will dry up, it's likely we'll see a serious correction in the segment of the postmodern and contemporary art. At the same time, it is very likely that we will continue to see record prices for works of masters of the first row in the wake of increased demand for quality.

Meanwhile, the wine market experts claim that during the first year since the beginning of the crisis the price of high-quality vintage wines have not suffered. In reality, these investments even brought profits, as evidenced by an increase of 9,1% for the year of the index London International Vintners Exchange (Liv-ex), the calculation which takes into account the cost of one hundred first-class wines.

Quoted on the London Stock Exchange company Stanley Gibbons, which specializes in trade and investment in collectible postage stamps, which traces its history to 1856, increased its profit before taxes by 11% to 1.2 million pounds Sterling in the first half of 2008 compared with the same period a year earlier. While its sales rose 12% to 9.8 million pounds-sterling. In Stanley Gibbons is so confident in the excellent growth potential value of rare stamps, which offers its customers invest a certain portion of funds in this market segment is under full warranty return of capital.

Playing on the correlation

As with all financial markets, markets for fine art and other collectibles respond to many factors, including the current supply and demand, world events, the state of affairs in the global and regional economies, as well as personal activities and interests of wealthy investors. In this case, low liquidity and market efficiency of fine art and collectors' items rather than hinder their development and growth, historically created the opposite effect. The shorter the duration of the negative world events, the less noticeable the impact on the art and collectible market, compared with markets in most other investment assets.

During these short intervals on the art market and collectible items increased volatility, which has nothing to do with the situation in other market segments. This lack of price correlation can also be used as a highly effective risk management tool for a very important advantage that allows diversification of investment portfolios. If we talk about the longer-term upward trend in the market of art and collectibles, he is interrupted less often than other asset classes.

The result - the excess of average market rate of return on certain time intervals, which leads to an increase in the total amount of investment income while reducing the overall volatility of total investment portfolio.

It is assumed that markets alternative investment should have a very weak correlation with traditional investment products. Nevertheless, a growing number of those who believes that such a facility may no longer correspond to reality because of the rapidly changing investment environment, so after a while it should be reconsidered. The proof of this is the fact that in recent months income hedge funds to invest in these uncorrelated markets were well below expectations.

Impact of economic downturn

According to research Merrill Lynch / CapGemini, global art market and luxury industry tend to begin to feel the impact of economic downturns later than other market segments. Thus, it is not surprising that the effects of disturbances in global finances sunk to us just now. Nevertheless, historically, investing in fine art and other expensive collectors' items showed higher resistance to the negative effects of economic downturns, because their super wealthy buyers buyers tend to have relatively smaller losses in such market circumstances. Markets are "affordable (and coveted) luxuries" that are easier to get the owners of large capitals, as well as people with more modest financial means, may suffer more than others, if the financial crisis will be protracted. But, despite the presence of such fears, analysts tend to assume that new capital and growing consumer demand in the Asia-Pacific and the Middle East will continue to balance this negative impact of the global economic downturn.

Investors with a passion

One of the key indicators of the skills of private clients in terms of financial management is how much attention they give to finding high-yielding instruments or assets of the Alternative Investment Market. A significant proportion of their incomes secured individual investors got through strategic diversification of their portfolios in a wide range of asset classes. There is ample evidence that they intend to continue to build a balanced portfolio based on an informed and rational approach to its investments, regardless of prevailing market conditions today.

Despite all the upheavals of recent times, we expect this trend continues, although the demand for reduced volatility to the extent that, as private clients are becoming less tolerant of risk, and will have on her a deterrent effect. Statistical arbitrage and heavy quantitative investment strategies are unlikely to match this, and the transparency will be an important factor in establishing an investment product. All the complex and opaque to be torn away, and as customers begin to avoid too complicated arranged products (for example, will not buy products whose operation does not understand) will increase the interest in "real assets" such as objects of fine art and other collector's items.

Not least for the future growth of alternative investment funds is that, as we expect institutional investors continue to shift from traditional assets into alternatives, despite the current troubles in the markets, many imbalances and unresolved issue of "toxic" financial instruments. Likewise, we will witness the fact that investors will be much more emphasis on diversifying their portfolios of alternative assets through the use of a variety of traditional and new investment strategies.

Study

Given the growing interest in alternative investments and the increasing number of wealthy investors, who sent an increasing proportion of their income in this segment, it is interesting to analyze whether there is an optimal investment strategy.

Not so long ago there were some interesting studies in which the authors analyze the impact that alternative investments have a risk ratio of return on investment on the perception of private and institutional investors. In a study entitled «Emotional Assets» («Emotional Assets") for the authorship of Professor Maastricht University, Riyadh. Hey. Jay Campbell and two employees of the University of Tilburg Cu. Gee. Kediyka and Eph. Hey. de Runa, the results of market studies of several types of alternative assets, such as painting, wine labels, watches, atlases and books, which account for a total of more than half of all investments secured by individual investors in luxury goods.

Using a wide range of indexes, they analyzed the dynamics of prices of some alternative assets over the past 20-30 years. In this interval of time investments in all of the assets under study showed positive returns, though the return on investments in art, wine, books and the violin was in average 9% per annum for 20 years.

The coefficient of correlation of prices between certain classes of these assets was very high. For example, between the diamonds and coins, books and atlases, wall and wristwatch, and brands. Nevertheless, the dynamics of some price index there is a significant discrepancy, which allows investors to earn good money on investments in a diversified portfolio of alternative assets. The biggest impact is able to bring a strategy to minimize risk while maximizing profitability, when in a broad diversified investment portfolio of stocks and bonds share a place with alternative assets such as vintage wines, or books. This is the first study on the inclusion of alternative investments in the overall investment strategy.

Fund structure

Collector's wine and art - two of the most developed segment of the market alternative investments, so that today, investors can easily invest in them their money with a large number of the respective funds. A relatively recently begun to appear specialized funds with which you can invest in a variety of classes in a collection, such as memorabilia associated with the names of sports stars, music, movies and the like. All of these funds use a wide range of trading strategies similar to those practiced in private equity and hedge funds, earn a price arbitration.

Following its installation to monitor the funds alternative investments on a global scale, we identified two rising powers as distinct strategies, one of which focused on the optimal allocation of investments across sectors, while the other - more opportunistic. The first strategy follows the approach the world's leading collectors, who tend to focus on some narrow sectors of the wider art market. Investment funds using this strategy, try to achieve the target growth of capital over the medium to long term through active investment management and distribution of the widely diversified portfolio, distributed between the most developed, market sectors, such as Old Masters, Impressionist, Modern and Contemporary Art.

The second strategy translates the activities of the world's leading art dealers and auction houses and includes search capabilities for financial transactions or direct investments that can yield substantial profit on the shorter time interval.

Funds that use opportunistic strategy, seeking opportunities for investment in regional or niche sectors such as Asian, Indian, Arabic art, as well as photos and the like. Capital gains achieved both by active transactions for buying and selling collectible items to extract a quick speculative profit, and at the expense of longer-term growth in value of investments in undervalued assets with high potential.

No less important is the evolution of funds of art in itself. We see that today they are actively managed on a global scale in three key dimensions, including investment opportunities, capital cost and risk. A critical element of success of any fund that invests in this unique asset is his ability to find attractive opportunities to invest their funds on acceptable terms.

Majority of funds is achieved through the involvement of knowledge and experience of the widest network of international experts to facilitate search and identification of a given investment opportunities. In addition to this, found the opportunity may be further expanded and developed through the study of economic and behavioral characteristics in this market segment by management. Pricing anomalies, market trends and economic data may help to identify specific regional and sectoral investment opportunities, and those funds that will be able to cope with this most effectively will be able to stand out. Like the manager of private equity investment fund of art should not only do the right deal at the right time and at the right price, but also seek to increase the cost of each specific asset under its control. Most funds try to achieve this goal through a wide range of curatorial and marketing activities, which are usually practiced by successful collectors and dealers.

Finally, investment in art, collectibles and other Passion Investment (like all investments) involve a substantial risk of loss. Such funds should be able to manage risk in their portfolios at several levels.