Diamonds do brilliantly with funds

It’s well-known that girls have always had a not-so-secret camaraderie with diamonds, now it seems the fund world is getting in on the benefits of that acquaintance. Diamonds are the icon of a harmonious bond, and the relationship between Harry Winston Diamond Corporation and Diamond Asset Advisors makes that symbol literal.

Diamond Asset Advisors, co-founded and chaired by Peter Laib, former managing director of global private equity fund of funds and investment service company Adveq, is set to launch a $250 million limited partnership, offering institutional investors a participation in the expected value growth of polished diamonds. It will use the inventory of Harry Winston, which will also act as custodian of the diamonds.

The premise of the fund is a simple demand and supply equation, with existing diamond mines beyond their peak capacity, and no new major mines imminent. At the same time there is strong consumer demand, particularly in Asia, with China the second largest market for polished diamonds. For investors this alliance provides access to the wholesale market price of polished diamonds.

From an institutional investor’s point of view, Laib says an investment in the fund is a defensive play, with some investors also looking at it in terms of their “special opportunities” bucket.

The fund is targeting a return of 12 per cent net a year, in combination with low volatility and low correlation, and importantly a below market management fee of 1.25 per cent.

Laib says investors are increasingly looking for tangible assets with low volatility and inflation hedges.

“We decided to design the portfolio from the investor point-of-view in terms of risk/return and have double digit returns and high downside protection. About 25 per cent is invested in special upside kicker with 75 per cent in the mostly liquid segment,” he says.

Laib says the wholesale polished diamond market is about $20 billion, and while some diamond merchants have tried to set up funds in the past, they lacked the knowledge regarding fund structures and investor needs. Laib and his team bring this to the table, while at the same time increasing the inventory for Harry Winston to fuel its growth plans.

Laib says about 12 pension funds are doing due diligence, with interest also driven by the success of the gold  market.

“Some pension plans have not done gold and see what they’ve missed, (so) don’t want to miss diamonds,” he says. “I’m predicting in two years there will be a financial market for diamonds.”

Giving further impetus to the market trend is the fact the global macro hedge fund manager, Covenant Financial Services, is also capitalising on the multi-generational transfer of wealth from west to east and moving a small portion of capital into diamonds.

It is putting together a collection of large, rare stones that it intends to hold for one to three  years.

One of the drivers of investor interest, it says, is the fear of the weakening US dollar and the search for “stores of value” that will hold their own in inflationary environments.