In an investment landscape increasingly characterized by volatility and a relentless search for uncorrelated assets, traditional portfolios of equities and bonds often fall short in delivering optimal risk-adjusted returns. However, a fascinating frontier has quietly emerged, offering a compelling proposition for generating investment alpha: the luxury watch market. Once primarily viewed as personal indulgences or collectibles for enthusiasts, high-end timepieces are increasingly demonstrating their prowess as a viable alternative asset class, capable of outperforming conventional investments and offering significant diversification benefits. This shift is fueled by globalization, a surge in global wealth – particularly among middle and high-income groups in developing countries – and the recent proliferation of online niche marketplaces that have enabled systematic data collection and analysis.1
Far from being a mere hobbyist pursuit, investing in luxury watches, especially the pre-owned segment, presents a strategic opportunity for discerning investors. The market for pre-owned luxury watches reached an estimated USD 27 billion in 2022, approximately half the size of the primary market, with forecasts suggesting it could surpass the primary market, potentially reaching USD 80 billion by 2033.2 This substantial and growing market size, coupled with unique market dynamics, positions luxury watches as a powerful, yet often overlooked, component for enhancing investment portfolios.
The most compelling argument for considering luxury watches as an investment asset lies in their demonstrated financial performance, which, when analyzed through robust financial metrics, often surpasses traditional asset classes.
Direct Performance Comparison: Empirical studies reveal that the luxury watch market has achieved remarkable returns in recent years. Between 2018 and 2023, a constructed watch index yielded an average quarterly return of 2.01%, culminating in a cumulative return of 49.35%.
According to a 2023 research paper by Gustav Sjostedt and Sara Mannerford of Linkoping University, this return significantly outperforms conventional benchmarks. The MSCI World Index, representing global equities, recorded average quarterly returns of 1.38% and cumulative returns of 31.90% over the same period. The Bloomberg U.S. Aggregate Bond Index, a proxy for bonds, showed an average quarterly return of -0.01% and cumulative returns of -0.15%.
Another study by Siegfried Köstlmeier Klaus Röd at University of Regensburg analyzing the global luxury watch market between July 2010 and March 2022, found that a price-weighted market index of luxury watches (WatchDow) gained 0.64% per month. While this was less than U.S. (1.30%) and global (1.01%) stocks during that period, it outperformed both bonds, commodities, and gold. This consistent outperformance against traditional fixed income and commodity assets, along with competitive or superior risk-adjusted returns against equities, underscores the potential for alpha generation.
When comparing luxury watches to other collectibles, the picture remains favorable. While some alternative assets like certain fine wines have shown strong performance (e.g., Liv-ex Fine Wine 100 Index yielding 1.32% per month from Feb. 2020 to March 2022), and art markets also saw significant gains, luxury watches have been identified as among the most profitable investments in recent years. However, it is noteworthy that older studies on collectibles like wine and art often showed them underperforming traditional assets, suggesting a shift in market dynamics and investor perception over time.
Superior Risk-Adjusted Returns: Beyond raw returns, the true measure of an investment's quality lies in its risk-adjusted performance. Metrics such as the Sharpe ratio, Treynor ratio, CAPM (Capital Asset Pricing Model), and Jensen’s alpha are crucial for this assessment. A higher Sharpe ratio indicates better risk-adjusted performance, while a positive Jensen’s alpha suggests outperformance relative to expected returns based on systemic risk.
Luxury watches consistently demonstrate superior risk-adjusted returns. The watch index created in the Linkoping University study outperformed the MSCI World Index and the Bloomberg U.S. Aggregate Bond Index across all these financial metrics. Specifically, the annualized Sharpe ratios for top watch brands like Audemars Piguet (0.64), Patek Philippe (0.60), and Rolex (0.68) were notably high for the July 2010 to March 2022 period. Another study, spanning January 2019 to September 2024, found Rolex with an annualized Sharpe ratio of 0.68, Patek Philippe at 0.60, and Audemars Piguet at 0.64. While the overall watch market Sharpe ratio of 0.115842 from the Linkoping study and 0.55 from the Regensburg study might appear relatively low compared to a "good investment", it still surpasses the negative Sharpe ratios of the MSCI and Bloomberg indices (-0.006481 and -0.001925 respectively) in the same period. The positive Jensen’s alpha for the watch index indicates it generated excess returns relative to its systemic risk level, a highly desirable outcome for investors. In contrast, the Bloomberg index showed a negative alpha, implying underperformance.
Low Volatility Profile: A key contributor to the strong risk-adjusted returns of luxury watches is their remarkably low volatility. Their standard deviation of returns is often comparable to, or even lower than, U.S. Treasury bills and significantly less volatile than stock markets. For example, according to a third study, Patek Philippe exhibited a weekly volatility of 0.90% and a minimum return of -2.03%. This low volatility helps to stabilize a portfolio, making them an attractive option for investors seeking to reduce overall portfolio risk. While the concept of "stale prices" (prices that don't immediately react to market changes) in collectibles can lead to lower observed volatility, the underlying benefit for a portfolio is still significant, as it allows investors to potentially allocate more to riskier assets without excessively increasing overall portfolio risk.
One of the most valuable contributions luxury watches can make to an investment portfolio is their ability to enhance diversification and reduce overall risk. This is particularly pertinent in today's increasingly interconnected global markets, where traditional assets often exhibit high comovement.
Low/Uncorrelated Returns with Traditional Assets: Luxury watches typically exhibit low correlation with traditional asset classes such as stocks, bonds, and gold. This low correlation is a cornerstone of diversification, meaning that when traditional markets experience downturns, luxury watches may not follow suit, thus cushioning the overall portfolio. For example, the correlation between the overall luxury watch market and the MSCI World Index is a mere 0.04, with gold at -0.04, fixed income government bonds at -0.09, and real estate at 0.01 [Panel B, Table 4, 221]. This suggests that luxury watches are largely independent of the movements of these conventional markets. Even within the luxury watch market itself, while brands like Rolex show a strong correlation (0.74) with the overall market index, other brands exhibit much lower correlations, such as Tudor at 0.08 and Hublot at -0.06 [Panel A, Table 4, 220, 221]. This low correlation is a consistent finding across multiple studies.
It's important to clarify that while luxury watches offer significant diversification benefits due to their low correlation and resilience, some studies, such as one analyzing the market from 2010-2022, conclude that they are neither a perfect "hedge" nor a "safe haven" against stocks, bonds, or commodities in the strictest sense of consistently negative correlation during all market conditions. However, they undeniably enhance the general risk characteristics of a well-diversified portfolio. Another study, specifically from 2017-2024, explicitly states that luxury watches do yield significant diversification benefits and outperform traditional assets on a risk-adjusted basis. This reinforces their value as a portfolio component designed to reduce overall risk and improve the efficient frontier.
Resilience During Crises: Luxury watches have demonstrated remarkable resilience during periods of global economic shocks. This characteristic is a vital aspect of their diversification appeal, providing what could be termed "crisis alpha." During the severe stock market decline in Q1 2020 due to the COVID-19 pandemic, when the U.S. stock market plummeted by 27.78%, the luxury watch index remained largely unaffected. In fact, four out of six luxury watch portfolios examined generated positive returns (e.g., Tudor 1.32%), while the worst performer, Rolex, only saw a moderate loss of -0.45%. This stands in stark contrast to the significant downturns experienced by traditional assets. This resilience is attributed in part to shifts in consumer spending; with reduced opportunities for leisure activities like travel during the pandemic, individuals may have reallocated funds towards luxury goods. Similarly, during the Russian invasion of Ukraine in Q1 2022, while the MSCI and Bloomberg indices declined sharply, the luxury watch index showed a more subdued decline, suggesting its insulation from direct geopolitical impacts, possibly because its largest markets (America, China, Hong Kong, Japan) were less directly affected.
Portfolio Optimization Benefits: The inclusion of luxury watches demonstrably enhances the investment opportunity set and reduces portfolio risk. When added to a traditional portfolio of stocks, fixed income, real estate, and gold, a 10% allocation to luxury watches (specifically Rolex) can reduce portfolio volatility from 13.4% to 12.1%, and further to 9.5% with a 30% allocation [Figure 4, 215]. The 95% Value-at-Risk (VaR), a measure of potential loss, can be reduced from 2.22% to 1.56% with the inclusion of watches. Notably, all luxury watch portfolios in one study were found to lie outside the efficient frontier formed by traditional benchmark assets (U.S. stocks, Treasury bonds, and gold). This implies that investors can reliably expand their opportunity set by incorporating luxury watches, largely by reducing risk rather than solely boosting returns. Spanning tests formally confirm these benefits: Audemars Piguet, Patek Philippe, and Rolex were found to improve portfolio returns, while all six studied luxury watch brands (including Cartier, Omega, and Tudor) significantly reduced the global minimum-variance portfolio's risk. This solidifies their role in creating a more robust and efficient portfolio.
Generating alpha in the luxury watch market requires a deep understanding that goes beyond superficial brand recognition. The value of a luxury timepiece is intricately linked to a combination of tangible characteristics, technical accomplishments, and intangible emotional and symbolic factors. This complex interplay creates opportunities for knowledgeable investors to identify undervalued assets and maximize returns.
Key Value Drivers (Hedonic Characteristics):Research employing the hedonic pricing method, which regresses watch prices on their characteristics to determine their impact on value, reveals distinct value drivers:
• Brands: While Rolex is a household name, Audemars Piguet, Patek Philippe, and Vacheron Constantin consistently show a significant positive price impact, outperforming Rolex in many contexts. This phenomenon is explained by their appeal to an "extremely niche group of customers" who desire exclusivity beyond general public awareness, often belonging to the "Luxury Watch Hobbyist" and "Collector/Investor" groups who seek "super/ultra-luxury brands" expected to appreciate in value. Conversely, brands like Breitling, IWC, Omega, Panerai, TAG Heuer, and Tudor, while still luxury, tend to have a negative price impact compared to Rolex in some analyses, indicating they cater to a broader, slightly less exclusive segment.
• Features/Complications: Additional technical complexities and aesthetic elements significantly contribute to price. Chronographs, tourbillons, and rotating bezels are strong positive value drivers. These features, though not fundamental to time-telling, possess a "wow factor" that excites buyers and serves as a status symbol, reflecting an appreciation for technical complexity and craftsmanship. The presence of a GMT function or moon phase, while interesting, showed no statistical significance in one study.
• Case Materials: The material of the watch case plays a crucial role. Bronze, rose gold, and yellow gold consistently contribute to a higher price, with high statistical significance. Interestingly, ceramic had a negative coefficient, and white gold was only marginally significant.
• Movement: Mechanical movements are a hallmark of luxury watches. While automatic movements are more common, manual winding movements had a statistically low, negative price impact in one study, possibly due to fewer observations or specific brand associations.
The number of jewels and power reserve showed a positive but low price impact. Conversely, water resistance surprisingly had a negative price impact in one study, potentially because brands with higher water resistance (e.g., Breitling, Panerai) tend to be less expensive than ultra-luxury brands with lower water resistance ratings (e.g., Audemars Piguet, Patek Philippe). Case diameter had no significant price impact. Style-wise, "Sport" watches were associated with better prices, likely because they often include value-driving features like chronographs and bezels, while "Dress" and "Pilot" styles had negative price impacts, though "Dress" was not statistically significant. Plexiglass crystal, compared to sapphire, also showed a negative price impact. Bracelet materials varied, with steel generally outperforming other materials except rose gold, and rubber bracelets showing a clear negative impact.
The Role of Storytelling and Emotion: Beyond objective features, the luxury watch market is profoundly influenced by non-financial factors that drive demand and price appreciation. The authenticity and documentation of watches are essential for value, including original packaging, certification, and authenticity guarantees, crucial in a market prone to counterfeits. Deeply rooted brand history, in-house manufacturing, and meticulous artisanal skill also enhance desirability and price. These attributes drive uniqueness and scarcity, often leading to significant price appreciation. In addition, the narrative surrounding a watch can create powerful emotional and social value, influencing market prices significantly. Famous examples include the Omega Seamaster (James Bond), Cartier Tank Française (Princess Diana), and Omega Speedmaster Professional (Apollo 11 mission). This "symbolic or social capital" can lead to price spikes that defy traditional intrinsic value logic.
Understanding these multifaceted drivers is crucial for investors seeking to identify timepieces with the highest potential for value appreciation.
Successfully investing in luxury watches is not merely about identifying high-value pieces; it also involves adept navigation of the market's unique dynamics, from informational asymmetries to predictable trading patterns.
1. Informational Asymmetry and Competence Alpha: Unlike highly regulated traditional financial markets, the luxury watch market—particularly the pre-owned segment—is characterized by lower transparency. Prices are often settled directly between buyers and sellers, without centralized monitoring. This informational asymmetry creates significant opportunities for knowledgeable investors to generate alpha.
Deep Market Understanding is Key: "Competence in watches and the market is limited, valuable, and expensive". Investors with a thorough understanding of brands, specific models, historical performance, and intricate details can exploit these knowledge gaps to secure advantageous deals, avoiding overpaying or underselling.
Data Availability Challenges: Historically, there was a lack of systematic data tracking for pre-owned luxury watches. While digitization has led to platforms like WatchCharts and Chrono24 offering historical data, some limit free access or do not share sales prices, contributing to the market's opacity. This further emphasizes that investor knowledge is critical for improving expected returns.
2. Illiquidity and Longer Horizons: Like many other collectibles, luxury watches exhibit characteristics of illiquidity. This means they are less readily convertible into cash than traditional financial assets, and frequent, accurate price data can be scarce. Investors should be prepared for potentially longer holding periods to offset short-term fluctuations and effectively counterbalance any illiquidity issues.
Transaction Costs: The secondary market involves varying transaction costs depending on the channel. Auction houses typically charge higher fees (buyer's premium of 20-25%) but offer professional services, while online platforms like Chrono24 have simpler, often lower, commission structures (e.g., 6.5% of sale price, capped). WatchBox, operating on a spread model (20-40%), highlights the profit margins involved in this segment.
Inverse Momentum Effect: A unique behavioral anomaly observed in luxury watches is a significant negative momentum effect, where past "losers" (watches with the lowest recent returns) tend to generate economically large positive returns in subsequent periods. This contrasts with the positive momentum often seen in equities and suggests opportunities for contrarian strategies. This effect is more pronounced in "low-attention watches," implying that overlooked items present better alpha opportunities than those under widespread scrutiny.
3. Day-of-the-Week Effects (Tactical Alpha):A peculiar feature of the luxury watch market is its continuous, seven-day trading nature, enabled by online platforms. This allows for predictable day-of-the-week patterns that investors can exploit for tactical alpha generation.
The Sunday Effect: Studies consistently show that luxury watch returns are significantly lower on Sundays compared to other days of the week. This "Sunday Effect" also extends to lower conditional variance on Sundays for certain brands. This anomaly is likely driven by the predominance of professional dealers who constitute the majority of sellers on large peer-to-peer marketplaces. Since Sunday is typically a rest day in most Western countries, these dealers do not edit or update their listings to the same extent as on weekdays, leading to minimal price discovery and thus lower ask-price based returns. This pattern suggests that Sunday could be an opportune time to purchase luxury watches, potentially capturing gains as prices rebound during the week due to renewed professional activity and price discovery.
Contrasting with Traditional Market Theories: Interestingly, analysis of Rolex sales volume on eBay shows that sales figures are actually higher on weekends, and Google searches for "Rolex" peak on Saturdays and Sundays. However, this increased attention and volume does not translate into higher returns on those days for luxury watches. This contradicts attention-driven theories that often explain return patterns in traditional assets like stocks, which typically link higher attention to temporary price increases. This unique behavior further underscores the distinct market microstructure of luxury watches.
4. Distinguishing Physical Watches from Watchmaker Stocks: It is crucial for investors to understand that gaining exposure to the luxury watch market by investing in physical watches is fundamentally distinct from buying shares of listed watch manufacturers. The correlation between the physical luxury watch market and the stock returns of major watch manufacturers (e.g., Hermès, LVMH, Richemont, Swatch Group) is remarkably low, typically around 0.1. Most listed watch brands are owned by larger fashion or jewelry conglomerates whose business operations extend far beyond watchmaking. Therefore, investing in their stocks does not provide pure exposure to the luxury watch market; instead, it offers a diversified exposure to broader luxury goods or fashion industries, often with higher associated risk and return profiles than the physical watches themselves. This highlights the necessity of considering physical watches as a separate and unique investment class.
The luxury watch market, once a domain primarily for collectors, has unequivocally established itself as a compelling frontier for generating investment alpha. Empirical evidence consistently demonstrates its superior risk-adjusted returns and significant diversification benefits compared to traditional asset classes like equities and bonds. Its remarkable resilience during economic crises, coupled with low correlations to conventional markets, makes it a valuable component for building more robust and efficient investment portfolios.
However, success in this unique market is not guaranteed and requires a nuanced understanding of its intricacies. The ability to identify key value drivers—such as specific ultra-luxury brands (Audemars Piguet, Patek Philippe, Vacheron Constantin), complex features, and precious case materials—is paramount. Furthermore, navigating the market’s inherent informational asymmetries, longer liquidity horizons, and capitalizing on specific market microstructure anomalies like the "Sunday effect" or the "inverse momentum" phenomenon offers avenues for sophisticated investors to unlock additional alpha. It is also essential to distinguish between investing in physical timepieces and the stocks of watch manufacturers, as they offer fundamentally different risk-return profiles and diversification benefits.
For the discerning investor seeking to expand their portfolio beyond conventional boundaries, the luxury watch market represents more than just a means to tell time; it's an untapped asset class poised to deliver compelling investment alpha and enhance overall portfolio resilience. As with any investment, a thorough understanding of potential risks—including future value uncertainty, theft, loss, damage, and ensuring ethical sourcing and trading practices—is crucial. Nevertheless, for those equipped with the requisite market knowledge and a long-term perspective, luxury watches offer a strategic imperative for modern portfolio diversification.