Bloomsbury Financial Planning

Wine investment funds - which pool investors' money to buy wine to trade, hopefully at a profit - can offer a viable complement to more traditional asset classes.

Considered an alternative investment - like fine art, timber, even hedge funds - wine funds are mostly designed for capital appreciation.

Although the genre is new and there are perhaps just 20 such vehicles, they are gaining popularity among both professional investors and wealth management advisers.

"For anyone who believes in multi-asset portfolio management, the only way to make money consistently and reduce risk is to invest in various asset classes across regions," says Markas Gilmartin of financial advisers AWD Chase de Vere.

"Wine is a precious commodity, it has been performing brilliantly and it ticks a lot of boxes for an ideal risk-return profile," he adds.

While wine knowledge on the part of the investor is not necessary, financial savvy, a high risk threshold, and the ability to ask searching questions of the fund manager are.

The vast majority invest in the finished product - mainly red Bordeaux from top chateaux - as opposed to futures. The sweet, white, highly coveted Chateau d'Yquem is an exception, and there may be some top Burgundies or Champagne as well.

A few, such as the Germany-based VINOvation fund, invest in vineyard land, production facilities, and wine brand development.

Many of the funds have high subscription and management fees (2-5 per cent and up to 20 per cent, respectively) and large minimum investments (up to €250,000). Most concentrate on wine bottled in the past 50 years.

Several - including the Vinum Fine Wine Fund, ARCH Fine Wine Fund, and the Curzon Fine Wine Geared Growth fund - are listed on the Channel Islands Stock Exchange (CISX).

To evaluate the market and determine whether the funds' strategies are viable, Mr Gilmartin of AWD Chase de Vere and others rely on statistics provided by Liv-ex, an electronic trading platform for wine companies. Further sources of information are US and UK merchants and brokers and the Bordeaux negociant network.

Liv-ex keeps tabs on the prices of the world's most-traded wines. From December 2002 to May 2008, the Liv-ex 100 Index was up 158 per cent, compared with the FTSE, up 45 per cent; and Standard & Poor's, 50 per cent. Only gold - up 121 per cent - even comes close.

James Miles, co-founder of Liv-ex, attributes the increase in interest in wine investment to the internet. "Now prices are much more transparent, someone can put their offers out there and they are seen immediately by hundreds of potential buyers at the same time," he says.

The most bullish are keen to indicate that, due to its tax status, wine is outperforming oil. As a "wasting asset", wine may not be subject to capital gains tax, depending on how old it is, where it has been kept, and who owns it. (A wine investment fund is treated as a financial vehicle, however, and therefore is subject to the same tax treatment as any other kind of financial fund.)

Vinum is one of the few retail funds, and the first wine fund to receive Guernsey Financial Services Commission approval and be accepted for both SIPP and SSAS investment. Up 35 per cent since its launch in April 2007, Vinum requires a relatively modest initial commitment of £10,000 and boasts reputable custodians and auditors, something investors should insist on.

In a way, Vinum mimics the classic tenet so dear to wine lovers - buy two cases, hold until the price doubles, sell one and drink the other free.

"Our strategy is to purchase the best parcels and keep them," says Rob Lench, managing director. "We may 'top slice' - that is, sell off a certain proportion of that parcel if the price is right. But generally we buy and hold. This is how we foster growth and stability."

Another high performer is the Vintage Wine Fund. Launched in 2003, it is possibly the oldest - and largest (€115m) - of its type.

Fund manager Andrew Davison underscores the importance of provenance: "Investors should ask hard questions about where the wine in the fund is coming from. It is very difficult to confirm the provenance and authenticity of wine located in the US or East Asia, for example."

Managers recommend that wine-based investment should comprise at most 10 per cent of a portfolio. Investors must be prepared to take a long view. Some funds have lock-ins or long redemption notice periods.

"This asset class is really for investors who can commit capital for up to three years," says Duncan Hughes of ARCH Financial Products LLP, which in January launched the CISX-listed ARCH Fine Wine Fund - up 6.5 per cent.

"The bid-offer spread on an actively traded wine is still fairly wide, and it takes time to find the right wine at the right price. Investors must know this is not like buying Marks and Spencer shares."

It is also worth noting that while the Bordeaux price curve has generally veered upward, the stratospheric prices that have inspired these funds is also a recent phenomenon.

And although many are loath to admit it, the prices of the most prized Bordeaux are entangled with the pronouncements of a handful of experts, indeed, some would say just one: wine critic Robert Parker. If he deemed a choice vintage on the wane this might inspire a rush to sell.

This illustrates the precariousness of what many see as too rarefied an asset to be bought for anything more than pleasure.

"Put it this way, I'd rather stick needles in my eye than recommend one of these wine funds to my clients," says Jason Butler of Bloomsbury Financial Planning.

"Investing should be like watching paint dry - it may be boring, but clients should stick with the tried and true asset classes."