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Returns and Risks of Alternative Investments: The Case of Lego

Student: Iuliia Kishilova

Supervisor: Victoria V. Dobrynskaya

Faculty: Faculty of Economic Sciences

Educational Programme: Strategic Corporate Finance (Master)

Year of Graduation: 2018

LEGO has been suggested recently to be an effective way to diversify investment portfolios, especially in times of severe financial uncertainties. Two unique LEGO price indices offered фan opportunity to test this theory on the USA markets. The long-term LEGO index is comsctructed with regression methodology on prices drawn from Maciorowski (2015), giving 2,322 sets. The short-term index consists of monthly hand-collected data on 223 sets from Brickpicker.com for the period 12/2015 to 11/2017. We find, that different sets perform unequally with average returns ranging from -58% to 548% per annum, transaction costs included. The cross-sectional distribution of average returns has the mean of 15% and the standard deviation of 32%, leading to CV equal to 2.1. We find that LEGO returns are higher to the end of the sample period, which is probably due to LEGO secondary market development. Interestingly, we find the evidence for non-linear dependence of LEGO returns on the sets’ size: small and large sets tend to be more profitable than medium-sized sets. Additionally, various LEGO themes are not equally attractive for investments. Overall, film-based themes show higher returns. The hedonic and chain LEGO price indices have the average returns of approximately 10% per annum for the period 1987-2015. Our results indicate that LEGO outperforms the large stocks, bonds and real estate in the USA. Moreover, LEGO returns are not significantly exposed to market, value, momentum and volatility risk factors. We only identify a unit exposure to the Fama-French SMB factor, suggesting that LEGO investments perform similarly to small stocks. However, the correlations with the CRSP index are low (22%), and negative for bonds and property. Additionally, LEGO market delivered positive returns in the crisis years 2000 and 2008, when equities plunged. Overall, the LEGO market do offer an opportunity to diversify portfolios dominated by either property, bonds or shares.

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