It’s a bad idea to regulate the art market

September 7, 2010
this must be out of their minds:

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Anybody remotely attracted by this must be out of their minds:

The world lacks regulation of art securitization and art funds. With an exception of perhaps only India no country of any significant domestic investment market has a well defined regulatory framework for art funds… Well, as of this summer Russia not only has this framework but it already has the first pilot art securitization project on the way.

Leader, a powerful local asset management firm controlled by Putin loyalists, launched two closed end art funds on August 27 and is expected to complete subscriptions by the end of November. Skate’s has learned that once initial subscription period is over, Leader’s larger art fund (called “Sobranie” that can be translated both as “collection” and “meeting”) can raise anywhere between RUR 2 and 6 billion (US$ 63 and $189 million) in assets, and significant portion of those are expected to be large collections contributed to the fund in exchange for the fund units.

In other words, this is an art fund which powerful Russians buy into by handing over art rather than cash. The valuation of that art will be set by the fund, not the market — and of course if you’re a friend of the managers you might expect to get a particularly attractive valuation. Essentially, you swap full ownership of one big illiquid asset into partial ownership of a large pool of assets.

On the other hand, if you’re not a Russian friend of the managers, and instead are just investing cash, then there’s a real chance that you’ll be overpaying systematically for everything the fund acquires, and there’s always the risk that you’ll be massively diluted at any time. And that shiny new regulatory framework? Will be useless, if and when you come to need it.

Meanwhile, Bill Cohan says that he wants art galleries to be regulated by — wait for it — the Consumer Financial Protection Bureau:

Even if buying art is a rich man’s sport, there is still a need for some serious introspection among those who buy and sell art about putting an end to the questionable behavior of some dealers. And if that means that the art market needs to fall under the purview of the Federal Reserve at the newly created Bureau of Consumer Financial Protection — which of course no one in the art market will like — then so be it.

I’m not entirely sure if he’s serious about this, but of course it’s a dreadful idea. The last thing we need is some kind of formal ratification — by an agency of the Federal Reserve, no less — that art is a financial asset. The art market is broken, we all know that — but so long as everybody knows that the market is broken, there’s a limit to how aggrieved they can reasonably become if they go in with the idea of art being some kind of investment, and end up losing money.

The problem with any kind of regulatory framework for art dealers or even for art funds is that it gives them a veneer of legitimacy which they would then use to woo a huge new class of art buyers. The art market is minuscule in relation to more legitimate alternative investment classes, and even a small amount of “asset allocation” out of say old-school hedge funds and into art would create a lot of unnecessary disruption in the art market, mainly benefitting today’s dealers.

It’s much easier if we all just accept that the game is rigged against us, and that the only reason to buy art is to enjoy it. You can’t be ripped off if you’re paying for your own subjective enjoyment of an artwork. If by contrast you want to buy something which you’ll be able to sell at a profit in the future, you shouldn’t be in the art market at all.

(HT: Artnet)


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