Investing in Wine and Art as an Institutional Investor

Abstract

This thesis investigates the inclusion of art and wine in diversified investment portfolios, highlighting their potential for returns and portfolio diversification. These alternative investments, however, come with high transaction costs such as storage, insurance, and fees, which affect net returns. The study evaluates their strategic benefits and risks after adjusting costs in theoretical and practical portfolios. The research demonstrates that art and wine can enhance portfolio diversification, mitigating volatility, and increasing Sharpe Ratio. Negative correlations with traditional assets contribute an important role in enhancing risk-adjusted returns. After adjusting for costs, annual returns on art show a decrease of 3.56 percentage points, yielding a return of 11.47%. Meanwhile, wine experiences a smaller drop of 1.12 percentage points, resulting in an annual return of 8.51%. In conclusion, although costs significantly reduce returns, diversification consistently benefits investors by improving their risk-adjusted returns mainly through a lowering of the standard deviation.