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28 Sep 2006

Hedge Funds and Wine

Robert Lyster, co-founder of hedge fund Lyster Watson Management Inc. has found a new investment for his hedge fund millions, the land rich, cash poor, winemaking lifestyle.

Wall Street wine mavens interested in purchasing a Burgundy vineyard or expanding their investments, have the opportunity to invest in the some 105 million bottles of chardonnay white wines and 75 million bottles of pinot noir reds produced annually. There are about 4,000 “domaines” and 59 types of soil beneath the Cote d’Or’s 50-kilometer (31-mile) stretch.

The draw for wannabe wine landowners is investing in the legacy of 2,000 years of Cote d’Or winemaking that goes back to Roman times, but the lure of being part of that legacy can can be a fatal attraction, according to a Bloomberg report.

“Owning a domaine is a venture capitalist’s dream, high in risk and if the weather is good and you’re really lucky, you might make a 4 percent return. But owning a domaine is the greatest lifestyle imaginable.” Says Wasserman, a vinyard owner in his own right.

It takes three years after the first harvest for the wine to be ready for market,” says Wasserman, who has been a Burgundy wine trader for 40 of his 62 years. “You’re not making a cent for three years, and then your buyers must wait a minimum of three to four years after that before they can drink it. Perfection wouldn’t appear until the wine is six to eight years old…..The land will cost you $6 million, and that will produce 90 casks of approximately 25,000 bottles of wine.”

Wasserman says it would cost an additional $4 million to revamp the domaine and keep it running for three years with workers, equipment and a new winemaker.

Wholesale, the wine would fetch between 15 euros and 30 euros a bottle, the price more dependent on media hype than quality. On the shelf, the wine would probably retail for $50 to $55 a bottle.

“Your first sale on a $10 million investment at best would net less than $500,000 after three years,....And you’re not going to sell all 25,000 bottles.”

As founding partner of his hedge fund Robert C. Lyster conducts in depth research on the strategies and results of more than 2,400 hedge funds representing all investment styles, hedge funds are not only more complex, but because they are also influenced by market factors in different ways than traditional investments, hedge fund analysis calls for specialization and focus. Lyster Watson has focused exclusively on hedge funds for the last 13 years.