Building a portfolio with things, not paper - Julia Werdigier

Zelda Cheatle, a London photography gallery owner, is close to sealing one of her biggest and most peculiar deals. Next month, she expects to sell about 4,000 photographs in a single transaction, but the buyers will not be allowed to keep the works. Ms. Cheatle manages a photography investment fund set up by the London-based hedge fund WMG, which raised the money to buy the photographs, including Pablo Picasso by Brassai and Malcolm X by Eve Arnold, from a handful of investors.

WMG hopes the fund will make returns of as much as 50 percent over three years by buying and selling the art. ''With the right expertise and attitude, collecting photography is a good investment,'' Ms. Cheatle said.

As investors search for places to put their money, hedge funds have expanded investments beyond stocks and bonds into art, wine, rare stamps and even soccer players. Money managers have begun to look at these so-called exotic assets as a way to diversify risk while searching for assets that may provide a cushion if the market boom ends. Critics, however, call them too risky and opaque.

''There's a new wealth that will not go away, and that means for luxury cars, watches and wine, there will always be demand,'' said Stephen Decani, a partner at Arch Financial Products, a London-based firm that runs a fund investing in Bordeaux wines.

Michael Hall, the chief executive of the Stanley Gibbons Group, a coin, stamp and autograph collecting company that offers investment funds, considers his funds ''a safe haven for cash.'' Areas like wine and art investing, previously reserved for the rich, are becoming more mainstream as pension funds and institutional investors look for ways to spread risk. Booming stock and credit markets have left asset managers and private equity firms with loads of cash and a hunger for new opportunities.

Yet many large institutional investors balk at the risk, saying such investments are difficult to price and difficult to monitor. Stocks or bond investors can track the value and the performance of their portfolios minute by minute, while those buying into fine wines or soccer players have fewer tracking methods. There are indexes that track the price of wines, like Liv-ex, and art, like Art Market Research, but they offer limited insight into how the markets move, tracking certain wines or artworks sold at certain auctions.

One problem for investors, Mr. Hall said, is that they are largely at the mercy of the specialized fund managers. ''Would the average investor know that autographs by Robert De Niro are worth more than Tom Cruise's because they are rarer? Probably not,'' he said.

The need for special knowledge keeps the size of the market small. For Jan Vilhelmsen, a partner at Absolute Return Partners in London, some level of transparency is a must. ''We stop when we can't get a good sense of how you price an asset,'' he said.

Transparency may improve as time allows for a price and performance track record, but some managers, like Philip Hoffman, who runs the Fine Art Fund in London, disagree. At least art will never be as transparent as stocks, he said, because ''every painting is different'' and making high returns requires knowledge and market expertise.

Returns for investments in wine and art, the most established exotic investment types, have been strong. Prices for the 4,000 most popular artists, like Andy Warhol and Pablo Picasso, as tracked by Art Market Research, increased 20 percent last year from a record in 2005 and gained 75 percent since 1988.

The Liv-ex 100 index of investment-grade wines, which is more than 90 percent weighted toward Bordeaux, rose 49 percent in 2006 after rising
18 percent in 2005. A case of Chateau Latour brought $:5,290 at a Sotheby's wine auction in London in January, 5 percent more than at a similar auction in September.

''Demand from Asia, Korea, China and Japan, where wine is perceived as a status symbol just like a Rolls-Royce or a Louis Vuitton bag, increased dramatically,'' said Peter Lunzer, who five years ago was among the first to develop a capital structured vehicle for wine investments. He now has $:10 million under management, about half of that coming from private investors, and his five-year funds all have a plan to double their investments.

Yet, even if returns are bigger than those of stock funds, some analysts said they may be harder to realize because exotic markets remain small and less liquid. That means investors in exotic assets can be stuck with their investments if they want to sell.

''The liquidity is difficult and means you may not be able to realize returns when you have to sell,'' said Frances Hudson, global thematic strategist at Standard Life Investments in Edinburgh. ''The illiquid nature of the investments can be problematic for some investors.''

But investors may overlook that shortfall in exchange for some fun and a lively dinner party conversation. In June, Mr. Hoffman invited investors in one of his art funds to Geneva to admire and discuss some Picasso and Ed Ruscha paintings over lunch. Arch Financial Products organized wine tasting trips, and investors in WMG's photography fund will get the first right to buy any prints in the fund.

''It's really as much a lifestyle thing as an investment,'' Mr. Decani said.