Yoav Dror's List: Art Investment Funds

• 15   to 20% along with opportunities for portfolio diversification
• Société Générale   Asset Management (SGAM), which promoted a Luxembourg-based
• ArtVest, launched in 2004 by art dealer Daniella Luxembourg,   established offices in New York
• Fine Art Fund (FAF), based in London
• The China Fund, headed by former Sotheby's executive Julian   Thompson, specialises in oriental art
• The Art Collectors Fund, based in Switzerland,
• Russian fund Aurora
• The Art   Trading Fund, p
• increase margins by cutting out   the middlemen and -
• assembled   a stable of living artists, whose work it will sell to a   network of buyers. Since each artist produces a steady stream   of work, they can be viewed as income-producing assets,   with a proven earning base of around £2.5m a year.   In addition [it] says the fund will also buy art from sellers   suffering from the three Ds - death, divorce and deb
• In April 2008 The Art Newspaper reported the establishment   of the Meridian art fund and noted that ArtPlus, an "art   trading company" based in Luxembourg, was seeking investors
• ArtPlus, managed by Micky and Serge Tiroche, was reported   as seeking US$200m to develop the Tiroche family art trading   business, in which the founders hope to issue shares in three   to five years. The brothers reportedly believe that "long   term fundamentals have never been better for the art market".   Micky Tiroche runs a commercial gallery in north London and   co-founded the Tiroche Auction House in Israel. Serge Tiroche   has been a Citigroup banker.

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• aims   to invest in emerging art markets (primarily Asia, Russia   and the Middle East) on the basis that "culture follows   money" and "this is an opportunity to buy cheaply
• Dean Art Investments   announced the US$50m
• In   Australia The   Art Fund
• Gibraltar-based Castle Apollo
• IndexAtlas, based in New York, also announced the launch of   a fund in 2008.

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• BNP Paribas fund
• BNP Paribas, reportedly lost   over 40% of its US$8 million investment in art
• The unpleasantness has been attributed   to paying too much for works in the collection and failure   to accommodate market conditions when planning sales
• sponsorship of contemporary art events
• profits being   shared 70:30 between investors and the fund manager
• The annual   management fee was to be equal to 3%
• The   main reason why international art funds have underperformed   and not fulfilled their potential is because they have been   led by financial and not art institutions.
• No financial   institution can understand the aesthetics and history of   art as a result of which no financial success is sustainable   in the long run

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• Fund management involves a range of tasks, including
• raising   capital
• liaising   with investors
• identification   of potential acquisitions
• supervising   works that have been acquired, for example ensuring that   there is appropriate storage, transport, insurance and security
• negotiating   with curatorial institutions
• determining   when to unload the investments onto the market
• selling
• manager would be able to contribute   capital to the fund (taken by some investors to be a sign   of credibility) and to share directly in returns from disposal   of works, for example take a percentage of the profit on a   sale rather than relying solely on a fixed management fee.   Philip Hoffman's Fine Art Fund, for example, is reported to   charge an annual management fee equivalent to 2%
    of the fund's assets, with a 20% share of profits from sale   of works.
• one million and   five million per investo
• Investors would typically be locked into   the fund for five to ten years;
• stakes would not be tradable   through a secondary market.
• not been through a public prospectus
• it is arguably not realistic to   talk of an art investment fund industry
• Financial institutions have considered establishing specialist   funds but in practice have not proceeded, either because they   have encountered difficulty raising capital for such funds   or because they have recognised crucial difficultie
• strategies employed by art funds are likely to take two   forms
• first is to trade recognised major work
• A second strategy is to acquire, hold and then sell works   that are more clearly undervalued.
• Such works include those   by artists who are recognised as important but not of the   first rank.
• It is a riskier strategy, because it involves some forecasting   about what will be recognised in five, ten or twenty years   time
• However it is likely to be more profitable
• The second strategy is analogous to buying shares in small   but established high tech companies (rather than giants such   as IBM), on the basis that they combine during possibilities   for appreciation without the risks associated with investment   in startups. Using that analogy blue chips, such as Picasso,   will retain value but not show the same increase in value   as less prominent competitors

  • Important about strategy
• Some funds have proposed offsetting costs by leasing their   collection
• Additionally,   the Trust will deliver to its investors the ability to rent   art from the Trust Collection
    at a favourable rate, and the ability to purchase works   of art from it
• That   acquisition would involve an independent valuation. Rental   charges are expected to be around 15 to 20% of a work's value.
• professional investment adviser
• Those advisers are the same sort of people working in client   relations and management positions in private   equity funds
• have no background in the   art
• second stream is people with a background in the commercial   art world,
• they bridge the gap between   the suits and technical specialists
• contacts across the art world - scholars, journalists,   curators, consumers and artists
• public persona for marketing upmarket collectibles,
• people   who can tell an original from a reproduction
• third stream is technical specialists
• many fine arts graduates   to do anything that brings them closer to their love or gives   them a foothold in the industr
• range of expenses throughout their operation
• A salient cost is people
• paying managers, advisers and a   range of service providers from receptionists through to publicists   and lawyers.
• promotional and client relationship   activity such as cocktail events and even one on one dinners   with dealers and potential investors
• storage, transport and insurance
• nvestors could   lease items from its holdings for an annual fee of 1.25% of   the art's insured value
• Transaction costs,
• In aggregate those costs can be in the order   of 10%, 17.5% or even 20% of the price
• sales taxes
• there are no operational   guides or manuals about setting up and managing a fund.
• information   that allows comparison with other investment opportunities,   for example statistical information about major stock market   indices and venture capital   fund performance

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• has arguably attracted more media and academic interest   than practitioners.
• desired liquidity, capital appreciation and revenue strea
• Contemporary art investment vehicles (AIVs) emerged after   the 2000.
• increasing sophistication of part of the   investment community
• availability of capital
• increased access to information about   prices,
• with   investment in art being seen as hip, 'sexy' - far more exciting   than speculation in pork bellies or copra futures - and even   visionary
• In practice performance by the BRPF was not spectacular (as   discussed below the trustees might have got better returns   by investing in the share market) and resulted in more media   coverage than emulatio
• Marketing by Merrill Lynch and Kidder Peabody of funds for   speculation in classical coinage ended in pain for the investors   and substantial losses for the promoter
• over 23 funds based in Europe and North   America
• as of late 2008   it is difficult to talk of an art fund industry that features   a range of players, clear benchmarks for performance and transparency   in competition
• They do not aim to hold those works in perpetuity. The period   of retention reflects the balance between
• Regulatory frameworks are analogous to those of hedge funds.
• It is   easier to get capital from a small number of rich investors   than from a large number of poor investors
• That orientation also reflects administrative costs.
• As a result proposals for art investment funds have   centred on provision of capital by a single entity (the BRPF   model) or by a handful of investor
• Unlike   property and shares, quality art is largely insulated from   the volatility of investment markets providing vital diversification   when markets are falling. The art market is considerably   less volatile and is less sensitive to economic crises and   geopolitical events than other assets. Compared to many   alternative investments, art also involves low transaction   and holding costs
• One   of the things that sustains the art market is an irrational   faith in a continuous rise in prices
• People fall out of fashion quite rapidly.   So this idea of the inviolability of the modern art market   is a fantasy.

• It is clear, however, that

   
   
  • not   all works have appreciated at the same rate
• rices   paid for canonical works rise and fall in the short term,
• prices   rise and fall in the long term as works move in and out   of the canon.
• acquisition,   maintenance and trading costs are tangible (expertise is   expensive and is required because information about the   market is thin, auction houses or dealers take 10% or more   of the price, there is no dividend or rental stream to offset   storage and insurance costs
• prices   are influenced by factors such as interest rates, inflation   rates, endorsement by scholars and institutions, and 'behavioural   finance' (ie perceptions that prices will rise steeply and   with low risk, encouraging speculation
• Peter Cannon-Brookes' 'Art Investment   and the British Rail Pension Fund

  • get this book
• Art   as an Alternative Investment Asset' by Raya Mamabarchi, Marc   Day & Giampiero Favato (here).
• Jianping Mei & Michael Moses' 2002 paper (PDF)   'Art as Investment and the Underperformance of Masterpieces:   Evidence from 1875-2002'
• Olivia   Ralevski's 2008 MBA dissertation Hedging the Art Market:   Creating Art Derivatives
• Rachel   Campbell's 2005 paper   'Art as an Alternative Asset Class
• Don Thompson's The $12 Million Stuffed Shark: The Curious   Economics of Contemporary Art (London: Aurum 2008)

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