Famed Spanish philosopher George Santayana once said, Those who cannot remember the past, are condemned to repeat it. And to anyone thinking of starting a hedge fund that invests solely in collectibles, you best heed this advice. To prove this point, please kindly join me as we get in my DeLorean time machine and journey back to the 1980s. This was at a time when rare coins became the darling of Wall Street with the advent of the first third-party coin grading companies. Third-party grading was a true game changer for the industry, and two of the prominent companies are still in business today. You probably know them as the Professional Coin Grading Service, also known as PCGS, and Numismatic Grading Company, known as NGC. Coins were the first collectible to be third-party graded, and as a result of this development, collectors could confidently trade in these treasures while knowing exactly what they were buying. Up until this point, the market for rare coins was rocked by numerous reports of unethical dealers selling over-graded coins to uneducated buyers. Trusted third-party grading revolutionized the industry almost overnight, and now a lot of coins that werent actually scarce were in significant demand. This caused a massive speculative frenzy to occur in the market for graded coins. Wall Street took notice, and several brokerage houses got involved and helped convince the average collector on Main Street that rare coins were worth investing in just like mutual funds and traditional financial assets. During this time, Merrill Lynch launched two funds that catered to the rare coin market. These funds were aptly named the Athena I and the Athena II (fund), and investors were sold promises of high returns. Most people did not understand the risks. Unfortunately, as the saying goes, the path to hell is paved with good intentions, and quite incidentally, this defined the outcome of these two funds. As could have been predicted by almost anyone versed in the rare coin market at the time, Wall Street bankers did not understand the idiosyncrasies of the market, and unethical dealers sold the funds overpriced coins at the expense of the funds investors. By the early 1990s, investors successfully sued the funds for mismanagement, and Merrill Lynch at the time decided to buy back shares of the funds rather than admit any wrongdoing. Since this time, Wall Street learned a valuable lesson and steered clear of offering direct investments in collectibles, with very few exceptions. Even today, most Wall Street insiders who actively pursue investments in these markets do so through the use of private equity, and more often than not, they take an equity stake in the grading companies and auction companies themselves, rather than choose to create direct investment options in antiques and collectibles themselves. While it is true that there are some companies out there that do offer fractional ownership of scarce collectibles to investors, these services have for the most part struggled to gain mainstream momentum. For the record, I am not a fan of fractional share investing in the collectibles trade. If you dont know what this is (and without naming any of the companies that offer this service), these are companies that buy scarce collectibles and offer investors the chance to purchase shares of the item as an investment. So, if the company buys a comic book that they value at around $100,000, they may offer 100 shares costing an investor $1,000 each to own a piece of that comic book. Unfortunately for the investor, however, if the item does go up in value on the secondary market, all shareholders must vote if the item should be sold, and the profits (if any) will then get redistributed to the investors. The problem I have with this business model is that each investor is being charged management fees and related expenses for the privilege of owning a fraction of these sought-after collectibles. Collectibles in and of themselves are already mostly non-liquid, and as such, this method of investing usually inflates the amount of fees the investor pays while also making the investment even more non-liquid than it already is. A true investor who wants to invest in collectibles can easily do this without having to lock up funds in shares of collectibles that they do not directly own. As such, it is generally the uneducated who fall for the kind of slick marketing these companies use to pull in unsuspecting investors. That said, what is old is new again, and Wall Street tends to never fully learn from their mistakes. We now have hedge funds that are starting to focus solely on high end luxury collectibles. Case in point, Luxusfunds LLC (www.luxusco.com) is a hedge fund that offers accredited investors a chance to invest in Hermes Birkin Bags. Hermes Birkin Bags became a fashion icon due to the fact that you cannot just walk into a Hermes retail store and buy a Birkin Bag. You actually have to be invited, and the company limits how many bags they produce and who can buy them. As a result, over the last few years, Birkin Bags have become an asset class reserved for truly affluent celebrities that are lucky enough to be able to purchase them on the primary market, directly through Hermes. For anyone else wanting one of these elegant handmade bags, they must be purchased through the secondary market. High profile auction companies like Sothebys, Christies, and Heritage have now become market leaders for anyone willing to spend five to six figures (or more) to own these treasures. Much like the collectors market for Rolex watches for men, women now have their own luxury collectible that can be treated as an alternate investment. Luxusfunds LLC was started by Dana Auslander, who is an ex-Blackstone company executive and who also appears to be fascinated by the investment potential of Birkin Bags. The company started two funds devoted to the beloved handbags, and both are currently closed to new investors due to overwhelming demand. In conclusion, I am always fascinated by these kinds of investments. While it is true that certain investments in the antiques and collectibles trade can have fantastic returns (side note: just ask anyone who bought and held rare Pokemon cards over the last few years), there is also a tremendous amount of risk that the financial news media tends to ignore. Here is hoping that LuxusFunds LLC does a better job navigating these risks than the managers of the Athena Funds did back in the 1980s. Judging by the current track record of LuxusFunds (information is readily available on their website), they are already returning profits to their investors, but the market for luxury collectibles can turn on a dime. Rolex watches are a prime example, as during the pandemic they were the hot commodity to buy and sell. Today, the market for a lot of Rolex watches is lukewarm at best. So, what will become of Hermes Birkin Bags? Time will tell, but I certainly urge caution before pursuing something like this as an investment, and in most cases, if you are a well-educated collector, you can easily invest in collectibles without the help of Wall Street. After all, as anyone educated in finance will tell you, Wall Street doesnt do anything for free, and collectibles are no exception. Shawn Surmick has been an avid collector since the age of 12. He currently resides in his hometown of Boyertown, Pa., and is a passionate collector of antiques and collectibles. His articles focus on various topics affecting the marketplace.