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What is The Watch Fund? Sneak peak into an extraordinary albeit bizarre investment scheme

What is The Watch Fund? Sneak peak into an extraordinary albeit bizarre investment scheme

Having been in the asset management industry for more than four years, I have come across a ton of funds ranging from mutual funds, commodity funds, hedge funds and private equity funds.

But today, it is the first time that I stumbled across something called The Watch Fund. My first instinct is: “It sounds a bit odd and bizarre, isn’t it?”.

Friends who know me, know that I love watches. I was actually researching on watch investing and came across an article from New York Times with the title: Watches Are Yet Another Easy Way Rich People Make Their Money Into More Money, This is how I found out about The Watch Fund.

I went into The Watch Fund page, and a few things caught my eye.

watchfund

Source: The Watch Fund

“Optional 10% net annualized guarantee”

“20-30% net annualized return with 2x collateral”

Naturally, I was very curious on their business model, how it works, and kept on reading further.

The Watch Fund was started by a guy called Dominic Khoo together with 7 other low profile partners. Dominic is a watch expert and has 17 years of experience buying, wearing, and selling watches (his full bio can be found here so I won’t write so much). Think of him as a not-so-typical hedge fund investor where he is actually buying something which he thinks he can get at a lower price or fair value, and selling it for higher.

It was also mentioned on The Watch Fund‘s web that it’s acquisition approach is extremely complicated – something which I fully agree as this is not an easily accessible market. Having went to numerous authorized dealers (ADs), Rolex shops in both Singapore and abroad (Melbourne, Switzerland, Germany, Taiwan, Hong Kong), most of the salesperson will tell you “there is no stock…the waiting list is three years long”. We do not actually know if there is such a thing called the waiting list, but rather it seems more like a deterrent to me.

To get your hands on a sought after watch model, tt is rumoured that you have to be a VIP or having bought a lot of watches before. End up the day, it’s all about the connections and your buying power.

Source: Random Instagram posts. Which I confirm it to be true because I have been monitoring the watch market for the past 3 years.

How does The Watch Fund work?

Sourcing of watches is the most critical aspect here, followed by getting investors to believe in this investment scheme.

Based on what I read, The Watch Fund’s sourcing is one of their key strengths which they source from three angles. Sounds easy but actually it’s not in reality.

  1. Rare timepieces which they managed to build up connections over the years. I believe they have managed to establish a wide network globally which allows them access to the rare and sought after timepieces. Not something easy to do as it requires credentials, reputation, expertise and a lot of time cultivating those relationships.
  2. Extremely limited edition timepieces worn by famous people. This could be worn by a royalty in Saudi Arabia or a famous actor / actress. Original manufacturers may produce one of such type of watches which makes the value sky high. Again, these are not readily accessible even to those High Net Worth individuals. You need the connections and reputation to gain access. Definitely something worth finding out.
  3. Buy at a discount. With the ability to buy rare pieces, buying power is not an issue. With a strong buyer power, comes a strong negotiation power as well. Hence, it is not surprising that they are able to buy watches at a significant discount. From the seller’s point of view, they would rather sell it at a discount but to a reputable buyer.

Based on what I read,  basically you put a sum with The Watch Fund, they give you a portfolio of watches which you can wear it. After a few years, they give you a call (called the Profit Call), where you have the option to sell the watch at a net profit. Once you sold it, they then take a 10% performance fee of the profit, or 5% of total sale price depending which is higher. Sounds like a better deal than hedge funds and private equity funds where performance fees can range from 15-20%.

What are the criteria for you to qualify and join The Watch Fund?

Your starting investment must at least USD 250,000. I suspect this is also an exclusive club as they have currently >9,000 members with it. There is no yearly membership fee, which is a good thing as hedge funds and private equity funds have to pay a typical “management fee”. Other fees involved includes 5% purchase fee.

high ses

Source: Thehustle.co (Man with high SES flying private jet ;))

So now, what do I think of such a scheme?

I think for someone who wants to participate in The Watch Fund, they definitely have to have knowledge of watches (although The Watch Fund claims that collectors are not the same as investors, and if you don’t like watches, you would be a perfect fit for their type of investor). Reason being you have to know what type of watches you will be getting.

Although I must say this investment scheme is definitely interesting albeit slightly bizarre. But I do think it is a profitable scheme. The number of fine watches can only be manufactured by so much each year and the demand is gonna increase year after year with more people being affluent.

I quite like the idea of putting up front USD 250,000 and getting a portfolio of watches as I believe the value of fine watches will go up over time. Furthermore, unlike stocks where there are so many institutional market players, it is difficult to know where the market will be headed each day.

Disclaimer: different watches and models are each unique in their own way and the value can fluctuate over time. It is really difficult to predict how the value will turn out. Ben Clymer, founder of Hodinkee mentioned that the market for Rolex Daytona went haywire for a bit which left watch collectors and investors puzzled.

“We saw references worth $20,000, $25,000 in 2011 to 2015 all of a sudden worth $50,000, then all of a sudden worth $80,000. And now those same references are worth $65,000. That’s still significantly higher than they were, but they’ve come down from the stratosphere.”

I guess after all, watches are still consider an “emotional” thing, which makes it very difficult to put a value on it.

What do you guys think about an investment scheme like The Watch Fund? Share your thoughts below.

Cheers,

Vincent



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