Are Art Funds getting popular?

The last few years has seen a significant increase in the number of art investment funds that have launched or are in the process of being launched. Much of that growth is due to the increasing recognition by the investment community that
 (i) the art market continues to benefit from significant price appreciation,
(ii) traditional investments in stocks and bonds over the last decade have generated, and many expect will continue to generate, poor investment returns,
(iii) the ownership of art can serve as an inflationary hedge, especially in light of the inflationary monetary policies employed by many countries in response to the 2008 credit crisis and resulting recession,
(iv) art funds can produce returns that have little or no correlation to those of more traditional stock and bond investments thereby helping to diversify the overall risk of an investment portfolio, and
(v) the lack of regulation of the art market provides unique opportunities for arbitrage that can be exploited for the benefit of art fund investors.

Moreover, as most art funds are structured so as to weight art fund managers’ compensation towards performance incentives that involve a significant sharing of the gains earned by the art fund between the fund’s managers and its investors, talented art market professionals are electing in growing numbers to form or work for art funds so as to share in compensatory arrangements that have the potential to greatly exceed those of traditional positions within the art world.

You heard of Art Funds?

Well since we are on  the subject of Art, do you know what are art funds?

They are generally privately offered investment funds dedicated to the generation of returns through the acquisition and disposition of works of art. They are managed by a professional art investment management or advisory firm who receives a management fee and a portion of any returns delivered by the fund.

The underlying characteristics of art investment funds are diverse and vary from fund to fund. While all art funds utilize some form and degree of a traditional “buy and hold” strategy, art funds differ in their aggregate size, duration, investment focus, investment strategies and portfolio restrictions.

The unifying factor of all art investment vehicles is their focus on the art market, which is characterized by a lack of regulatory authority, deficient price discovery mechanisms, the non-transparency of the market and the subjective value and illiquid nature of fine art. Proponents of art investment funds argue that it is these very characteristics that generate the significant arbitrage opportunities within the market that seasoned art professionals can exploit for the benefit of the fund’s investors. Likewise, critics of art investment funds in turn point to such characteristics as denoting art as the riskiest asset class, thereby creating the potential for substantial investment losses among the fund’s investors.