How Long Before Hedge Funds Control The Rare Card Market?

[Archive]

Posted By: bruce Dorskind

About a year ago, we suggested that a number of Hedge Funds would soon
look at rare baseball cards as an investment opportunity.

Whilst the reaction to this post was generally negative, our conversations
with a number of Hedge Fund professionals led us to the conclusion
that rare cards, as well as other collectibles, were a strong investment
possibility.

This weak, The Deal (wwwTheDeal.com) one of the most influential
and respected news sources on Wall Street carried a story about a hedge
fund that has been formed to "dominate the rare violin market."


In our view, a 25-50 million investment in rare baseball cards would
enable a fund to acquire a number of important collections and completely
change the nature of the baseball card business. Whilst this may not be
a popular idea amongst longtime collectors, those who have assembled
formidable collections of rare high grade cards will have the opportunity
to realize an incredible return on their investment.

Violin Story

One US fund promoter announced:

For the last forty years, the value of great violins has increased dramatically. Being that they are 'tools of the trade', they are not prone to the fluctuation experienced in the fine arts market. This consistency makes the purchase of great instruments historically one of the most secure of art investments. Moreover, the use of one of these classic treasures can change the course of a career. We encourage individual and institutional investors to explore including stringed musical instruments as a separate asset class in investment portfolios to preserve the purchasing power of scarce capital ...

A conservative estimate of the annual appreciation of a great violin used to be between 5% and 10%. However, already starting in the late 1970's, due to the globalization of Western economies, the influence and activities of foreign organizations and individuals in local markets have caused violin prices to rise more rapidly. There has been a steady increase in the rate of appreciation of great instruments. Since examples set the standard in the market, Machold Rare Violins looks to the sales prices of extraordinary violins to evaluate the current rate of increase. Today, we put the average annual percentage of appreciation between 10% and 15%


Yours truly,

[Archive]

Posted By: barrysloate

Wealthy people may decide to buy very large baseball card collections for themselves, but I don't see them putting together portfolios for their clients. I think it would be a bad move.

[Archive]

Posted By: Jason L

This brings up the topic of one of my threads from a month ago that asked the question if others had seen any formal discussions of the card market as an asset class.
Obviously, if a hedge fund forms with the purpose of managing card collections as assets, then this would answer the question rather definitively.

How does the violin market differ from cards?
How far away from this could we be in sports collectables?

Is there good market information available in the violin market? (Is it better than that in the cards market?)
Is 3rd party grading/authentication a big component of the violin market?

[Archive]

Posted By: JimCrandell

Bruce,

Great post--You are one of the most thought provoking posters on the board.

The recognition by money managers or hedge funds of sports cards as an investment class would be a major deveopment and lead to a major leg up in the values of rare high grade pre-war sportscards. I will watch with interest.

[Archive]

Posted By: JimCrandell

Barry,

Why? Anyone who would have had the foresight to invest a sum of money in high grade vintage sportscards in the last 5-10 years would be looking at huge returns today. Not that this is an indicator of future appreciation but if this were to happen, making a major investment before that might work out well. I always think of sportscards as X% of my investment portfolio and X% of my net worth. Same thing as any collectible. It should not be a major part of your portfolio but nothing wrong with 5-10% if you have money to invest.

[Archive]

Posted By: Kenneth A. Cohen

The scenario presented by Mr. Dorskind does not seem at all farfetched to me. We have seen manias on much crazier commodities - e.g. tulips and beany babies. One thing for sure, you know it'll be time to get out, at least from an investment angle, when you start getting hot tips on baseball cards from your barber.

[Archive]

Posted By: pas

Violins are a bit different in that musicians actually use, and presumably drive the demand for, high quality older instruments. Perhaps there are people who just collect them, but certainly the great violinists of the world also demand and pay for, and use, Stradivariuses and similar instruments -- presumably because they sound better, etc. So unlike cards there is some "intrinsic" value there. That said, it is hard to ignore that cards can be both a hobby and an investment, although one wonders whether hedge funds with fiduciary duties to investors would be willing to take the chance on future appreciation.

[Archive]

Posted By: Al C.risafulli

It's an interesting subject, for sure, and definitely one that goes completely against the grain for those of us who participate in this hobby as a distraction from this sort of thing.

I count myself among those people who considers baseball cards to be a "hobby" as opposed to an "investment," but at the same time, I am certainly aware that there is a dollar value associated with the cards I collect.

Looking purely at prices realized for cards, and nothing else, it certainly behaves like a "market." Certain issues get popular and prices rise, other issues lose their popularity and prices drop. Hordes of cards are occasionally discovered (i.e. Dormand Postcards Gil Hodges) that have dramatic impacts on the prices of that issue, and certain cards can be viewed as "blue chip" cards that will always appreciate in value. And looking at the "market" as a whole, there certainly has been a steady appreciation in value over the years - definitely more so than some funds or company stocks.

Even the most die-hard collectors among us have various strategies that they use to preserve the value of their cards. There's even a thread running right now that was started by Dan McKee - a collector I respect greatly - about the merits of keeping uncatalogued cards uncatalogued, as a way of preserving value.

For me personally, I enjoy cards for a variety of reasons, very few of which have anything to do with their value. At the same time, as is the case with any other collectible, there is always going to be a segment of the population who is interested in the investment angle - owning something that is less pervious to the swings in the stock market, something tangible that you can hold in your hand but still has value, etc. And, of course, there will always be people who are interested in owning such items but don't want to do the research involved with actually getting to know what they're buying.

It's not my particular style of collecting, and it definitely rubs the "purists" among us the wrong way, but it's no less legitimate a reason to collect than any other reason.

So I guess that's my long-winded way of saying that I don't think it will be long before an enterprising individual is managing people's card portfolios, and perhaps even creating investment funds based on rare collectibles. And ultimately, I don't think the presence of such a thing will harm the hobby one bit.

-Al

Edited to be even more long-winded. I'm doing my best to fill the gap for Peter C for the morning.

[Archive]

Posted By: Tom Boblitt

it isn't ALREADY happening...........

[Archive]

Posted By: Jerry Hrechka

Already happened in the graded coin market (Late 1980's). Coin values ended up dropping severely and are only just now beginning to recover. Ultimatelely true value and demand will be determined by collectors.

[Archive]

Posted By: Chad

And I'd bring this up to my boss, but I don't want to lose my job. I can see cards being used for an individuals investment portfolio, but they're just not liquid enough for use in a hedge fund. At least not a fund that operates on margin which are most of them. The nice thing about stocks, bonds and currencies is that you can buy today and sell tomorrow AND you don't have to worry about a conrer getting bent or depending on a third party to determine if the corner of your Treaury Note has been rebuilt.

--Chad

[Archive]

Posted By: barrysloate

Jim- you have invested a portion of your own money into baseball cards because you have a knowledge and appreciation for them. Would you recommend them to your clients? Or to put it another way, if a client wrote you a check for $1 million and asked you to put together a baseball card portfolio for him, what would you do?

[Archive]

Posted By: JimCrandell

Barry,

Yes to knowledge and appreciation. I collect because I love the hobby but given the size of my collection, I keep an eye on value and I always list it in my assets right along with houses, stocks, bonds etc. Yes if a client had a net worth of $15mm or more I would suggest $1mm in cards.

What would I buy? Probably high grade(PSA 8 or 9) Ruths, Cobbs, Wagners, Gehrigs, low pop cards from major sets in 8 or 9, genuinely rare items in lesser grade.

Jim

[Archive]

Posted By: Jimmy

There is a definitely talk in business about investing in collectibles in general and sports cards and memorabilia are on the top of the list. I believe over the last 10 years the card market has grown to one of the most interesting and marketable hobbies which has turned collecting into investing for many people. We all invest a lot of time and money in the hobby we enjoy so much and that is way the hobby is worth a second look by leading investors in business. If you just look at the amount of companies that have been created or have grown over the past 10 years that have an interest in what people collect, we can see that the interest and investment will only get better over time.

Jimmy

[Archive]

Posted By: barrysloate

Jim- fair enough, and collectors have been putting away high grade cards since the 1970's. But they have almost always done it themselves, based on the knowledge they acquired. Asking a hedge fund manager to do it is a different story. Would he know what he was doing? I don't think baseball cards can be bought blindly, and I have never put a portfolio together for a client. I would much prefer he learned to do it himself, and should I have cards for sale that would fit in, all the better.

It's not the investment part the bothers me- I've seen how much cards have appreciated over the years- but the idea that somebody other than the collector himself is putting this thing together.

[Archive]

Posted By: pas

Low pop commons are not great investments in my humble opinion, their value is easily compromised when (as is inevitable) more are found. It's a dramatic example to be sure, but 52 Bowman Casey Stengel was previously thought to be a low pop card in 8, routinely selling for over 2K. Yet Mastro just came up with a find of OVER FIFTY in 8 and 9, totally destroying the market for the card. I would stick to prewar HOFers for investment purposes, hard to go too far wrong there.

[Archive]

Posted By: Al C.risafulli

Here's two interesting questions for Jim and Bruce both:

Both of you have clearly been successful in your chosen careers, and both of you clearly have a keen interest in the financial component of vintage cards.

I would imagine that at some point, like the rest of us, each of you will enter retirement.

Upon retirement, would either of you ever consider a post-retirement career advising others in the area of investing in sports collectibles?

If so, how would you approach it? Jim, I know you've given us some insight into this thread as to how you might advise a potential client, but I'd be interested in digging deeper. Let's say each of you had a client with a high enough net worth that they had a million dollars to put into your venture. What, specifically, would you advise them?

Let's say the entire hobby is available to you - not just graded cards but ungraded, not just cards but memorabilia, and not just collectibles but the actual companies involved in manufacturing, selling, authenticating, and grading. You have the opportunity to invest a million dollars of someone else's money into the sports hobby.

What would you do with that money?

I'll think a little and volunteer my opinions as well, recognizing that my opinions are relatively worthless.

-Al

Edited for long-windedness once again.

[Archive]

Posted By: JimCrandell

Peter,

I heard that on the Stengel--thats bizarre.

Have you heard anything about that?

Anyway, when I say low pop I am talking about pre-war low pops for the most part.

[Archive]

Posted By: leon

Part of the allure for me is the difficulty in obtaining certain cards, in any condition. Another part of the allure is that baseball was/is my favorite sport while growing up ...and still today...though I rarely follow major league baseball currently. The 3rd part, and maybe (dare I say) just as important, is the fact that the little masterpieces of art have gone up in value. It's like a tri-facta in that respect. The other part of collecting that is great fun is the camaraderie involved. I have met hundreds of really great people in the hobby and, with this board, it seems like I meet new folks every week. With all of that going for it, it's no wonder cards can be thought of as an investment.....regards

[Archive]

Posted By: JimCrandell

Al,

Wow--I have always bought and invested for myself but if I was going to invest $1mm dollars the first thing I would do is have a number of conversations with people I consider to be very knowledgeable. I really don't know too much outside of cards but I would at least investigate it. I might consider giving Kevin seed money to start his service.

In cards, I would focus on high grade cards pre-war of the elite players of whom I mentioned four. I would then focus on rarities and would speak with people such as Leon or Jay Behrens or others who are knowledgeable. I would also consider condition rarities. An example might be making a bid for a rare 32 AC card(is it Lindstrom?) or the first Ruth card.

Jim

[Archive]

Posted By: Jason

cardtarget.com (not trying to plug them, but in this case it IS on topic).

and as Jim put it:

"What would I buy? Probably high grade(PSA 8 or 9) Ruths, Cobbs, Wagners, Gehrigs, low pop cards from major sets in 8 or 9, genuinely rare items in lesser grade."

that is seemingly their angle. Couple Mint 9 (PSA, SGC) t206s on there, as well as a budding Broadleaf 460 collection.

regards,
Jason

[Archive]

Posted By: pas

Jim, it was really bizarre, and I have not heard any explanation as to the origins of the lot. But it took probably 90 percent out of the value of the card.

[Archive]

Posted By: JimCrandell

Peter,

How about asking that super-knowledgeable group that you are still a member of and see if anyone knows--or maybe you couldn't tell me if they did as it would break the rules?

[Archive]

Posted By: pas

I can ask them under clause 1-c-DAV and get back to you.

[Archive]

Posted By: JimCrandell

Peter,

Does clause 1c-Dav mean don't send him the thread?

[Archive]

Posted By: Al C.risafulli

Never mind - just realized that Bruce started this thread and not Jim.

But Jim, you're hijacking.

-Al

[Archive]

Posted By: JimCrandell

Sorry Al--you're right. But I did try to answer your question.

[Archive]

Posted By: Al C.risafulli

I just find this thread interesting. The other thing - not so much.

-Al

[Archive]

Posted By: barrysloate

I wish I had even a clue what you guys are talking about

[Archive]

Posted By: Corey R. Shanus

My guess is that unless hedge funds know what they're doing (i.e., making acquisition decisions based on real knowledge and understanding of what they're buying), they will not be successful in garnering high returns for their investors. Spending a lot of money in and of itself will not be enough. I recall an attempt by a well known collectibles company to generate investment returns by spending heavily in the Halper sale. They bought several million dollars of memorabilia, only to ultimately be forced to liquidate some time later at an overall loss. At the time they made their acquisitions, others opined that for the most part they paid too much and bought items that did not reflect the cream of the memorabilia market.

[Archive]

Posted By: barrysloate

Corey- I remember that company well, and during the sale as I watched them bid and purchase very high priced material it crossed my mind that they didn't have a clue what they were doing. Not only were they paying too much, but they were buying the wrong things.

I think wealthy people with expendable cash should get into collecting and enjoy what they are doing. I don't think hedge funds will get involved in baseball cards, and if they do, the results may not be as good as they hoped.

[Archive]

Posted By: boxingcardman

$5 million will do it! Bring it on...

[Archive]

Posted By: Chad

It's not going to happen. Investment managers may get involved at the request of a client, but hedge funds aren't going to waste their time. If a hedge fund did decide to drop 30 or 40 million into a baseball card fund, where are they going to get the cards and then, who are they going to sell them to? And how are they going to sell this plan to subscribers? And how are the subscribers going to get their cash back when they decide to sell their subscription? I'm not saying it's impossible, but the money isn't big enough to deal with the headaches. Also, what would a fund dedicated to baseball cards and memorabilia use as their hedge? Cards are definitely an investment opportunity, but I don't see how it could work at the scale a hedge fund would need it to work and how a hedge fund could deal with the illiquidity of the cards.

--Chad

[Archive]

Posted By: JimCrandell

Chad,

As you undoubtedly know all hedge funds aren't hedged--you can be 100% long and unhedged.

On illiquidity, you could put the cards in a Robert Edward auction or one of the Evil Empire's.

As to where they can can get the cards--buy them at auction, from dealers and solicit collectors.

Lastly, if it is a diversified fund you don't necessarily need $30-$40mm.

Jim

[Archive]

Posted By: Jason L

I think you are right in that involvement by a true "hedge fund" is unlikely for the liquidity and strategy issues that you mention; however, I do believe it is entirely possible (and more likely) that an investment fund that is arranged more along the lines of traditional private equity could become involved and do quite well in this market, as these are vehicles where longer lock-ups are the norm...(which would be a more appropriate strategy and operating arrangement for this asset and market structure)

geez, how's that for a run-on sentence?

[Archive]

Posted By: barrysloate

Bruce- I have a question for you:

You started this thread early this morning, and as you always do, you walked away without offering any input whatsoever to it.

Why do you start a topic and then abandon it?

[Archive]

Posted By: Al C.risafulli

Yes, I did have some questions for Bruce and Jim that I posted earlier - Jim responded virtually immediately. Bruce?

Anyone else?

-Al

[Archive]

Posted By: Fred C

Doesn't there have to be a sustainable market for these cards if someone is going to use them as an investment vehicle?

If investors got into the cards then at some point in time the person or entity willing to pay the highest price for a card will own it, then what? If nobody is willing to pay more for it then there's only one way for the price to go.

What happens if all the investors want to cash out and nobody's willing to buy the cards for the price specified? The cards will either be sold for a loss or the person has to sit on them for an indefinite period of time in hopes of a turn around but by that time the investor may have missed the boat on another opportunity.

Have you ever heard the old saying that when the egg man drops by to sell you eggs you can name your price, if you go to the egg man than you're going to have to deal with his terms/price. If someone approaches someone to sell their cardboard then more than likely the potential buyer is in a good position to negotiate a good deal and there's a good chance they'll pay the seller less than what they paid for it. Who knows - in ten years there may not be a huge demand for the cards, then what? Mr. Hedgefund could be building a "house of cards" which could fall down at any time.

Like I always say, I hope the price of this stuff drops like a rock. It'd be nice to clear out the investors and allow collectors to enjoy thier hobby, again. My guess is that there are a lot of long time hard core true collectos out there that will never be able to complete certain sets due to the recent financial dynamics of this hobby.

Crash and burn baby. Crash and burn. I'd be happy to see the monetary market on cards crash.

I bet I'm not the only one that feels this way.

[Archive]

Posted By: Chad

You could go 100% long, but that's a lot of risk. Also, I think having to wait for a major auction to sell is pretty illiquid. The premiums auction houses charge are really large compared to the commissions on stocks, as well. Even if you could negotiate down the seller's premium, the buyer's premium isn't going anywhere. There's also the problem of coming up with an inventory. There are other obstacles as well.

I do think it is possible for a fund to get involved in cards, but for the amount of work, risk and return, I'm not sure why one would get involved. Again, if a private investor wants to use cards as part of a diversified porfolio, I think that makes sense. In fact, I can think of others way to make cards an investment. If you knew somebody sharp, who knew the hobby backwards and forwards, I could see giving that guy/gal some startup capital to start a dealership/auction house. I wish it made sense for a hedge fund to get involved in cards--it would make my work much more fun, believe me--but I can't see it. Of course, now somebody will start one and make a gazillion dollars while having a great time and I'll curse the day I was ever born.

--Chad

edited to add: Jason L, I agree with what you're saying. I think bringing the term "hedge fund" into this discussion may be confusing things, too.

[Archive]

Posted By: Joe D.

I don't think the personalities would allow it to work.

Rare Cards can be very very very illiquid and are controlled by card nuts like us.


I could only imagine the frustration of card-hedge-fund manager trying to deal with some real collectors to fill the hedge fund portfolio. Can you imagine trying to wrangle (1 of 1s) from collectors and having people to answer to?


those situations make for funny sit-com television.



so - for card hedge funds... I think the rare card market is not where success would be found.

maybe the semi-rare market.

[Archive]

Posted By: leon

On the face of it I can really appreciate what you are saying about hoping the value of cards drops like a rock. My guess is less than 50% of die hard collectors would want that at this point....since we spend so much on the darn things. Even a die hard collector that spends $1000 on a card, because he has to in todays market to obtain it, wouldn't want that value to go to $100.....Just a different perspective. regards
leon

[Archive]

Posted By: Jason L

has been born from reading your posts!

A new TV Sitcom (perhaps on TBS since they know funny)!!

Title: House of Cards

Premise: A hedge or private equity fund type of outfit, staffed by aggressive quant jocks with freshly minted MBAs try to make ends meet, while having to do business with the grizzled old hobby veterans in all reaches of this wonderful country.

Please, let's run with this...please add your ideas (in a separate thread if need be). Bruce may not mind if this thread is formally hijacked, since they are not around today!

[Archive]

Posted By: Paul S

Fred, philosophically I'm with you. In fact, I bought a lot of stuff years ago that I still have, so I wouldn't really realize any loss. But, can we wait until I sell it before the crash comes? Then I can at least buy it back again

[Archive]

Posted By: Marty Ogelvie

I want the market to go down also (way down) just long enough for me to secure a few 1,000 T206 cards.  Then it could go back up.. is that too much to ask?

martyOgelvie
nyyankeecards.com

[Archive]

Posted By: Alan

Does anyone remember when the baseball card market crashed in the early 1980's ? I remember I sat next to a collector, who bought a 1952 Topps Mantle for $600 in a live auction at the Columbia Hilton (Maryland) show sponsored by House of Cards (Huggins & Scott). Of course, after that crash, card values went back up higher & higher & higher....

Alan

[Archive]

Posted By: Marty

Most other collectibles have a world wide market. There are coin and stamp collectors everywhere. I know that there is some card collectors in other parts of the world, but I doubt that the percentage is that great. High end cards are not that liquid. Only a few collectors would be able to purchase the big money cards, and how many of them would invest in the funds so they would already have a piece of the action. The buyer's premium in the auction houses and how long between consignment and final payout is too long.

I do believe that there is a place for a manager to handle card collections or investments. There are people that currently do a large portion of the buying for some collectors.

[Archive]

Posted By: Fred C

Alan,

yes I remember those great 80's (and before). I remember picking up the entire semi-high 52T series (minus Mays) for about $400 in really NICE condition (almost pack fresh). I'm not so naive to think things will ever go back to those days but it'd be nice to see prices again from just 6-7 years ago.

Leon,

you're right, there are quite a few collectors that have spent well $1K (and well over that amount) on cards that wouldn't want to see the prices dump but I'm one that has spent a few dollars on this stuff and if it all dumped tommorrow I wouldn't care. Sure, I'd lose money on the paper side of it (excuse the pun) but I'd be able to pick up the pieces a lot more inexpensively over the long run if the stuff takes a dump.

Jason,

That could make for a fun comedy - I guess you get a couple of "geeky" looking dudes that are stock traders and show them eating up Wall Street. To use a line I've heard on the board before one of the guys could be at a bar and ask some girl if she wanted to see his Polar Bear Johnson.

Ok, the guys don't have to be total geeks. We are geeks, aren't we? Does anyone ever remember telling someone about their cardboard collection many years ago only to see the other person look at you like you were strange? Well, I guess today it's different. Today, you tell someone how much some of this stuff is worth and they think differently about it. I kind of liked it when it was a more sheltered hobby.

[Archive]

Posted By: David Smith

I think a hedge fund in baseball (sports) cards and memorabilia would be a bad idea. Not only is the market not as liquid as investment professionals would like but there is also risk involved.

ALL it would take to spook EVERYONE is the PSA 8 T206 Wagner to be shown as NOT being what people think it is. Say someone has definitive PROOF it is cut from a sheet or otherwise altered. This woud bring grading companies and ALL graded cards into question. That risk would make some, if not all, gte out of the market. Since you can't just dump cards on the market like you can stocks, it would take a while to unwind the positions. If it were known the cards were being dumped on the market, MORE people would dump their cards and prices would drop.

Just my opinion,

David

[Archive]

Posted By: Dave Hornish

Well, all of the 8's and above would finally and officially be in the hands of Wall St if Bruce's fantasy comes true. Since I'm in armpit land, it would not bother me one bit. I think it's a horrible idea for a fund though.

[Archive]

Posted By: Ed Ivey

Lock all cards in portfolios to those caring only about bottom line.

What happens to the allure of collecting - the very thing that has driven value up?

It tanks. Value flushes. The hedge fund managers become dime a dozen cold callers.

I'm no Warren Buffet. Just my hypothesis.