Does Bordeaux Fine Wine Constitute an Attractive Alternative Investment for Long-term Investors?

Abstract

This paper investigates whether Bordeaux Fine Wine is an attractive alternative investment for long-term investors such as Family Offices and high-net worth individuals. Using the Liv-ex Bordeaux 500 Index as a proxy for the Bordeaux Fine Wine asset class, the paper examines the key drivers of prices and returns, diversification benefits, risk and return characteristics, inflation hedging properties, and market efficiency of the asset. The analysis employs a fixed-effects framework to estimate a hedonic price model of Bordeaux Fine Wine. When controlling for château and vintage fixed-effects, the model finds that both the wine-specific and appellation-specific ratings of Robert Parker Wine Advocate as well as the wine age offer a reasonable degree of explanatory power of Bordeaux Fine Wine returns, albeit at the index level, while a significant downfall of the model is its failure to account for the effect of the underlying supply and demand dynamics on returns. The potential diversification benefits of Bordeaux Fine Wine, within a Markowitz portfolio optimisation framework, is assessed using a dataset consisting of monthly log-returns for Bordeaux Fine Wine and eight other assets between January 2004 to December 2022. The results suggest that Bordeaux Fine Wine provides some diversification benefits and inflation hedging properties, though the findings were not unanimous and found to be highly dependent on the period analysed. Even though the asset class may provide an alternative source of risk to a traditional balanced portfolio, the hurdle for inclusion arguably becomes higher when combining the equivocal findings with the commodity-like characteristics of Bordeaux Fine Wine, namely the significant storage and trading costs, the high liquidity risk and lack of cash flows. This conclusion is further supported by the likelihood of volatility underestimation in this relatively illiquid asset class. However, by employing unit root tests, the Johansen co-integration test and a vector error correction model estimation, the study find that Bordeaux Fine Wine offers attractive inflation hedging properties over the full sample period, suggesting there may be some “safe-haven” characteristics for the asset class akin to rare metals, even though these findings were not consistent across sub-samples. Finally, unit root and autocorrelation tests are applied to the dataset, finding that the Bordeaux Fine Wine market is weak-form market inefficient, however, again the results were not consistent across the two sub-samples. Hence, while Bordeaux Fine Wine appears to provide some diversification benefits and market inefficiencies that would suggest the potential for an investment manager to produce supernormal returns, the results are not unanimous and highly period-specific. Furthermore, an investment into Bordeaux Fine Wine requires a genuine understanding of the market dynamics, the risk associated with the asset class, as well as effective cost management derived from economies of scale from long-term investors such as Family Offices and high net-worth individuals.