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How investors can turn music into money

Forget gold, antique cars or fine art  to hedge against losses in stocks and bonds or boost your investment gains. There's another alternative investment especially for those in no hurry for quick gains: rare instruments. The Economist even says the violin market is “red hot."

London instrument dealer Florian Leonhard says the average Stradivarius -- created by renowned Italian violin maker Antonio Stradivari in the late 17th and early 18th centuries -- has increased in price by almost 11% annually over the past decade. (The Dow has gained an average of less than 7% in the same time frame.)

Carpenter Fine Violins, a boutique dealer in rare stringed instruments, says the rare instrument market has returned a compounded annual return of between 8% and 12% since 1950, but profits could top 20% depending on the particular instrument.

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Behind these steady gains is a limited supply coupled with increasing demand.

"These are the rarest pieces on the planet," says David Carpenter, the CFO of Carpenter Fine Violins and  one of three siblings who run the New York-based company. "At any given time there are five or ten Strads that are traded every year."

But the market is much bigger that just Strads, of which there are about 600 violins on the planet. "There are thousands of fine musical instruments on the market," says Lauren Carpenter, COO of the company. "There are Guadagninis, Amatis, Guarneri Del Gesus. On record there are almost 20,000 violins."

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And the demand is growing. "There are 40 million violinists right now in China," says David. "The moment that they're going to want the greatest instrument in the world ... the starting price for a Strad will be $10 million."

In the meantime, investors can expect relatively stable returns, while they own an asset that acts as a hedge against inflation and is "not correlated to other asset classes," says Sean Carpenter, the company's CEO and a former hedge fund analyst. "Even the art market has certain trends," says Sean. "Old masters might take a dip and then people would gravitate more to postwar art. Instruments go at their own pace."

Money isn't the only reason investors buy into this market. There's also the exclusivity and the music.

"These instruments were made for royalty; they were made for the Medici families, the Rothschild families...This is technically the most exclusive club in history," says David, who is also professional violist and has played at Carnegie Hall. "To actually own a piece of this history ... and loaning these instruments to a lot of soloists around the world ... these are intangibles that you just can't buy anywhere else." 

So how can you invest in the rare instrument market?

"To get an investment grade piece of fine musical instrument you generally have to start at $100,000, or $150,000 and it goes all the way up to the millions," says Lauren.

Investors can also co-invest in a syndicate run by dealers like Carpenter Fine Violins, which also maintains the instruments, playing them on a weekly basis or even more frequently. "That's becoming more commonplace and effective for us," says Sean. "We're able to own equity in an appreciating asset...[and] investors know we have skin in the game."

And after several years the instrument potentially could be worth several million dollars. A "Lady Blunt” Stradivari violin sold for $15.9 million in 2011, a record auction price. (Keep in mind that  many sales are private). But like any investment, returns are not a sure thing.

A Stradivarius violin valued at around $10 million and a Stradivarius viola with a record-breaking $45 million asking price failed to sell this year.

In addition to creating and running such syndicates, Carpenter Fine Violins makes money by owning and selling its own instruments, advising private collectors, institutional investors and first-time buyers and brokering sales of fine instruments, for which it takes a commission of about 6%. It's been involved in total transactions totaling over $100 million, says Lauren.

The siblings also founded the Salome Chamber Orchestra, a "conductor-less string ensemble dedicated to advancing the works of both underappreciated and well-recognized chamber composers alike," according to its website. The Carpenter siblings perform as members of the orchestra, primarily for charity events, and you can watch them below. 

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