Now here’s an asset class that can really make your mouth water. Stable, growing demand, naturally declining supply, low correlation, and talk about liquidity!

We’re talking about wine, of course. Though, in truth, wine investing is still a young business here in America, there are a number of wine funds operating overseas – especially in Britain, New Zealand, and Australia.

What is the appeal? As an asset that naturally becomes scarce and that often improves with age, fine wine typically appreciates in price over the course of its life, offering good returns to those willing to buy young vintages. There is also, without a doubt, some cache in wine investing.

However, like all investments, buying wine successfully for profit rather than palate requires more than attending the odd wine tasting. Jamie Ritchie, who is one of Sotheby’s top wine auctioneers, advises would-be investors to buy the best – the best producers, provenance, condition and vintage. He counsels “the important thing is to know the market.”

Andrew Davison does know the market. He heads up OWC Asset Management, which advises the Vintage Wine Fund in Britain. The fund was launched in 2003, and currently has about $26 million in assets under management. The fund’s ambition is to post gains of about 12% per year, within a range of 10% to 15%.

Mr. Davison considers this a reasonable target, though he has not attained those results so far. The biggest headache to date has been the weakness of the English pound relative to the euro, which last year caused British retailers to deplete local stocks available at old prices. The fund’s inventory was consequently marked down even as euro prices increased.

Recent figures are more promising; in January the fund was ahead 1.34% as buyers soaked up local inventory and prices began to rise.

He acknowledges, however, even with continued success, his fund will likely never be very big – $65 million or so might be the max.

Why so modest? Because the fine wine market is still relatively small. And, it is only in fine wines that one would want to invest. At the end of January, 64% of Mr. Davison’s portfolio was invested in red Bordeaux; another 10% was in top-quality Rhone wines.

Most of the wine in the fund is bought directly from the negotiants of Bordeaux, or producers elsewhere. Older vintages are purchased from dealers or brokers. The fund rarely buys at auction, since they would rather have wine that has continually been stored in bonded warehouses to be assured of condition.

According to Mr. Davison, the fund has one of the finest inventories in the world, now totaling about 12,000 cases. For instance, it owns hundreds of cases of famed 1982 Bordeaux such as Chateaux Lafite and Margaux which continue to go up in value.

How do they value their portfolio? By getting prices from a variety of sources online and selecting the lowest one. Most of the wine is of 1982 vintage or younger; the fund rarely holds a wine so rare that it has not recently traded.

Though nature plays a role in creating scarcity of great wine, the investment process is not a slam dunk. In order to have access to the top wines, a buyer must sometimes agree to also load up on inferior products.

This can mean buying from lesser vineyards to secure the output of the top growers or having to sign on for vintages that are inferior so that you remain on the list for the premiere years. Mr. Ritchie recalls the hit taken by buyers of 1997 Burgundies, which are still selling below their so-called release prices.

John Kapon, who runs the considerable auction business of Acker Merrill here in New York, maintains that the game for investors has gotten much tougher in recent years because of a general rise in release prices. This increase has benefited producers, but has eliminated for the most part the opportunity of flipping allocations for a quick profit.

Like most investment opportunities, buying wine directly, or though a fund, is not a certain thing. Research is essential – and can be lots of fun. Disposing of excess inventory isn’t too tough, either.

Ms. Peek is a former managing director of Wertheim Schroder, now part of Citigroup.