Novel Asset Management, a Cayman-based investment firm, is launching a new fund that focuses on the trading of rare diamonds.

The Novel Diamond Fund I is scheduled to launch on 1 July and will be available to institutional and sophisticated investors. At present, the fund has generated commitments of around $10 million and expects to raise another $10 million before it closes to subscriptions, by October 2011.

"Diamonds offer a compelling investment opportunity because supplies are constrained and demand is rising," said Alan Landau, the fund's director.

Diamonds take 10 years to mine, from discovery to production but demand for them, especially from emerging markets, is rising, the firm said. This boosts the product's profit potential, particularly with stones worth over $1 million, Landau added. The fund will have a two-year fixed life.

For the launch, Novel has partnered with Novel Collection, a specialty colored-diamond trading firm with branches in New York, Antwerp, Hong Kong and Tel Aviv. When the subscription period is over, the funds will be used to purchase cut and polished stones externally. No diamonds will be bought from Novel Collection.