With diamonds fast becoming best friends to growing numbers of luxury lovers in China and India, industry experts are setting up funds to help investors benefit from rising demand and prices for the stones.

After launching a first fund in May, diamond miner and retailer Harry Winston Corp is considering a follow-up with its partner Diamond Asset Advisors (DAA). Martin Rapaport, whose diamond price list is an industry benchmark, is also working on a fund project for next year.

"I think that over the long term there will be a strong appreciation of diamond prices based on increasing luxury demand from India, China and the Pacific Rim," said industry expert Rapaport, adding that a weak dollar would also increase diamonds' appeal as a safe-haven for investors.

Broader demand and a consequent improvement in liquidity should support diamond prices over the longer term, making such funds attractive, although the horizon is cloudy in the near term, some market watchers said.

Des Kilalea, an analyst at RBC Capital Markets, said he was generally confident about the upwards trend for diamond prices over the longer term. "In a normal market, I would expect very good demand (for DAA's fund), but in the current volatile environment, forecasts are difficult," he said.

Peter Laib, former head of private equity firm Adveq and now chairman of DAA, said diamond supply was unlikely to grow in coming years given that no new mine had been discovered and even if that happened, it would take years to exploit it.

Harry Winston and DAA this spring signed a deal for a fund of up to $250 million. It will buy diamonds sourced by Harry Winston's experts and consign them to the jewelry company that will thus have additional stock to open new stores and boost its growth without spending its own cash.

"Harry Winston would be interested in a second fund with DAA," said the company's Chief Operating Officer Ray Simpson.

"If there is strong appetite from investors for the first fund, the second could be launched immediately after the first sometime next year. The additional diamonds would also be available for Harry Winston to use and would further support our growth plans," said Simpson, who is going to join DAA soon.

DAA's fund is structured as a private placement, meaning its managers cannot give any indication on how subscriptions are going. "The interest is huge," fund director Claudio Ghisu said.

DIAMOND PRICES NOT IMMUNE

But past experiences have shown diamond prices are not immune to the state of the global economy. The first diamond investment trust, set up by investment firm Thomson McKinnon in the 1980s, was wound up after a slump in the market.

And Diamond Circle Capital Plc, the first publicly listed fund to invest in diamonds, has been treading water since it lost more than half of its value in the 2008 crisis.

First signs of a possible temporary slowdown may be already visible. "Certified polished diamond prices fell in August as cautious buyers reacted to economic uncertainty and Indian suppliers faced tight liquidity," Rapaport said in a report.

Also, institutional investors such as pension funds may be deterred by the fund's exclusive focus on one asset category and the lack of transparent market prices.

"The product sounds interesting but we would be very cautious," said Willi Berger, a fund manager at the public pension fund of the Swiss canton of Grisons. "The unilateral focus on diamonds would rather put us off."

Aware of the problem of opaque diamond prices, DAA said the structure of the fund could offer a solution. "The fund is very liquid: every time Harry Winston sells a diamond, we have a trade. This enables us to establish a price book," Ghisu said.

The Rapaport Group will introduce a diamond price index allowing the financial sector to monitor the price of diamonds on a daily basis, the group said last month.