Art funds return

By Felix Salmon
January 11, 2011
Heidi Moore, no less -- is running a long story about art funds.

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If proof were needed that the crisis is over and that we’re back to idiotic business-as-usual, then look no further than the fact that Dealbook—Heidi Moore, no less—is running a long story about art funds. These ludicrous creatures have strong claim to being the most ridiculous asset class in the world, no one should ever invest in them, and they invariably fail.

Heidi takes a disappointingly evenhanded “opinions on shape of earth differ” tone, presenting various art funds, and even the hilarious Art Exchange, with a perfectly straight face:

Proponents, like the art research firm Skate’s, are trying to legitimize the emerging movement by making the market more transparent and providing guidance to investors new to the art world…

By investing through funds, wealthy individuals can own art without paying the large fees and heavy taxes usually associated with full ownership. Some money managers claim returns can run as high 20 percent.

The field, with $300 million in assets, is small but growing. In Paris, the Art Exchange has plans to publicly list at least six pieces, including one by Sol LeWitt, and sell shares to investors. The Russian asset management firm Leader — controlled by close associates of Vladimir V. Putin’s — created two art-related investments. Last summer, Russia passed regulations to allow art to be turned into securities, the second country to do so after India. Noah Wealth Management and the Terry Art Fund are starting portfolios in China…

A handful of companies are trying to bring transparency to the historically shadowy, unregulated arena. Skate’s — founded by a Russian investment banker and entrepreneur, Sergey Skaterschikov — has set out to be “the Standard & Poor’s of art,” said its chairman, Michael Moriarty.

Most tellingly of all, the story comes with a highly-respectful portrait of Mr Skaterschikov by a NYT photographer. Heidi does gesture at reasons to be skeptical of this re-emergent market, but overall her piece is a ratification of the asset class, rather than the stern debunking it really deserves.

The first mini-boom in art funds came between 2005 and 2007; as Heidi notes, most of those funds have already cratered, less than five years after being founded. Anybody who invested in art funds last time around will have lost their money—and anybody who does so today will suffer the same fate. All art funds fail; the only question is when, rather than whether. I have never seen a single example given of an investor (as opposed to a principal) in such funds who has actually made money on his investment, and I don’t expect I will.

The silliest fund of all is the Art Exchange, which takes the concept of art-as-investment to its logical conclusion, and which is selling off shares in pieces by Sol LeWitt and Francesco Vezzoli at €10 apiece. It’s got to be the most stupid investment that anybody could ever make: the only way that it could ever be profitable is through the greater-fool theory.

Art is by its nature a negative-carry investment: you have to pay to store and insure it, but it pays no dividends and throws off no cashflow. As a result, the present value of a share of stock in, say, Sol LeWitt’s “Irregular Form” is equal to the amount it will eventually be sold for in the future, discounted by whatever discount rate you want to use. Except then there’s this, from the official Art Exchange brochure:

Simple exit conditions

In Art & Finance Service’s market, an artwork can only be removed from the marketplace once a single shareholder possesses all the shares.

This is essentially a guarantee that the artwork will never be sold. There are over 10,000 shares outstanding, and some of them will surely be bought on a lark by people tickled by the concept of owning 1/11,000th of a gouache. Trying to find those people and persuading them to sell their shares is far more trouble than it’s worth.* But since the piece will never be sold, the value of the shares, on any kind of DCF analysis, is clearly negative.

There is a case to be made that the wealth-management arms of big banks can and should have experts in the art market on staff. High net worth individuals often have a significant proportion of their net worth in art form, and that changes their risk profile. On top of that, they will occasionally want to borrow money against some or all of their collection. Their financial advisers should understand how the art market works and how much financial value there really is in the collection, over and above the pleasure that the collectors get from owning and viewing the work.

But if any adviser is asked about the wisdom of investing in an art fund, the answer should come clearly and swiftly: don’t even think about it. It’s all downside and no upside, and people who invest in such funds would always be better off just taking their money and buying an artwork they like instead.

*Update: Nicolai Hartvig reports that if an investor buys 80 percent of the shares, he or she can force the sale of the remaining 20 percent. But if an investor can buy 80% of a Sol LeWitt, they might as well just buy 100% of one outright, from a gallery.


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Absurd analysis, Felix. The entire article is composed of skeptical quotes – and prose- about the dangers of art funds, from everyone including Skate’s to art dealers to art appraisers to art investment partners themselves. Next time you should read articles for something other than the pictures.


Posted by HeidiNMoore | Report as abusive

Felix, you made me register on the site, great job! I should say that the most insightful thing in Heidi’s article was to quote Bill Browder. While I am very surprised Heidi contacted him for the comment and I know this story made quite a few people unhappy in Moscow, I nevertheless accept that was a brilliant quote to get, it brings a very important and unfortunately relevant perspective to reasons for surge in Russian (and Chinese) art fund industry. Felix, just watch what is going to happen with art funds in those markets. And please forget about the French thing, it has limited growth potential indeed, but that was not what Heidi’s story was about. Happy New Year! Sergey Skaterschikov

Posted by SkatePress1 | Report as abusive

Well you certainly got feedback!

There is really nothing like the appreciation of art by rich business folk! Especailly when they kindly allow a few people in to view it in the vaults!)

“One investor familiar with the Russian market said that the investments could appeal to a rising class of political oligarchs looking to keep money out of banks, where it can be seized should they run afoul of powerful friends.”

Nah, you think? Sounds like another artful way to money launder.

Posted by hsvkitty | Report as abusive


Just because you don’t see the value in a certain investment doesn’t mean it is a horrible idea. You can’t blame the funds for trying to bring liquidity to market where there is none.

As for having positive carrying-cost and relying on a greater fool, see GLD and how successful it has been since 2005. Same idea—investors pay a consumption dividend as well, just like I imagine they do in the art world.

Posted by MRLAMF | Report as abusive

I would try to be more open minded towards art as an alternative investment. Art funds fails because there’s too little awareness, few interest and plenty of disbelief. I don’t get it, people invest in gold but not in works of art, it doesn’t make sense, works of art are nothing but “gold with a soul”..
I’m sure that if somebody will be able to attract investors in the proper way, it will become a good idea and the art world will benefit from that (in terms of efficiency of the art market and because it will draw a broader attention on ART)


Posted by SFC | Report as abusive

Is there any market for leasing out this art, or is it sitting in a warehouse somewhere? If there is such a market, I would think this could be positive carry, unless it’s simply the case that nobody actually buys this art because they like having it on their walls, and that this art is all owned (almost) exclusively for the purpose of someone being able to say, “I own this!” In which case, as you indicate, the art exchange could be a very good idea, though it is facilitating consumption and not investment.

Posted by dWj | Report as abusive

@SFC, I would have to argue that people might choose to invest in gold and not art because it is useful beyong it’s use as currency. Aside from it being it pretty, shiny, and rare, it can be used in tecnological applications due to it’s characterics (i.e. maleable, good conductor of electricity, resists corrosion, etc.) That makes it desirable. Art has no practical value, it’s only function is to be looked at. It’s value relies soley on someones opinion of it. If I look at a piece of art and feel “Eh, it’s crap” that piece of art is absolutely worthless to me. And if my opinion should hold any weight it becomes worthless to a lot of other people as well simply through influence. The practical applications of gold are not opinions, they are fact. So to say art is “gold with a soul” might not be a good description.

Posted by iflydaplanes | Report as abusive

@iflydaplanes,i’d like to keep on believing that gold is worth close to 1400 because it’s maleable,good conductor of electricity and resists corrosion…What you write it’s true, but let’s face it,today it’s mostly about speculation…and if i have to play the morally questionable game the financial system often plays (i.e wild speculation), at the end of the day I would personally prefer to have in exchange a Brueghel’s “Hunters in the Snow” rather than a gold bar…it’s a matter of tastes!…
…than, nor the painting neither the goldbar give you a hug when you go back home, but that’s a different story :)

Posted by SFC | Report as abusive

For all gold’s questionability as an investment, it’s a fungible commodity that is very actively traded, so you at least have a functioning market pricing it. Art works nothing like this, especially recent art. Speculation in art is basically taking a wild stab at what a few market makers (a handful of big collectors, dealers, museums) will decide to push. A single player can decide to increase the “value” of a painting by 40% in a single transaction.

Creating shares in the works is an interesting experiment in trying to create more of a functioning market, I guess, but as has been pointed out, you can’t really create shares of the primary value of the painting, which is as an art object to be viewed and enjoyed.

Posted by Jboy609 | Report as abusive

I have been collecting art of various forms for over 50 years because I like artistic things. I began a career on Wall Street as an arbitrageur 30 years ago. I lived in Chelsea, in the ’70′s and Soho, in the ’80′s. I created an art in 20 years ago, and this decade, I have a gallery of contemporary Chinese art, in China.

Although I have always focused on the art, I have found that it has paid a good return. However, I have also observed that when any market becomes the focus of both the press and inexperienced investors, it is not a good thing. That happened in my original business, merger arbitrage, which, in the 1970’s and 1980’s, was shunned by institutional investors, but by the end of the 1990’s became part of the class of “absolute return”, and returns absolutely diminished to practically nothing, as the market became crowded with people attracted to the name: hedge funds, while having no idea what hedging truly meant. Then, it happened with stock markets, like the NASDAQ, in the 1990’s as discount on-line brokers made every electrician and plumber believe that they could trade stocks like any professional. It more recently happened with the Chinese stock market, and the market for art, in China, is littered with dealers and auctioneers whose focus is only on money, not on art.
As someone who has been in the investment business for so many years, I already know that most of the investment business focuses on marketing and design to lure investors into certain areas. That is what caused many a financial crisis, including the latest one. My reaction to art funds is not positive. As more people who lack real experience come into a market and promote it as an absolute money maker, the worse off it always become. I can only hope that this newest one will die a quick and natural death.

Posted by LeonaCraig | Report as abusive

I have been in the financial markets and the art business for 25 years. I have seen stock markets crash and art markets crash. The only difference between the two is that the Stock market is regulated and has a secondary market for liquidation. The Art market has No regulation, No secondary market and is an illiquid asset, which makes it very difficult to get your money back if the financial markets crash. Having said that, making the case for The Regulation of the Art Business/Market would be a good idea for everyone except for a handful of big auction houses, galleries, collectors, dealers, and museums. If a work of art can be valued and sold for $100,000,000.00 dollars (case in point: Giacometti’s “L’homme qui marche I” which sold for $104.4 million at Sotheby’s in February 2010 and Picasso’s “Nude, Green Leaves and Bust” which fetched a record $106.5 million at Christie’s in May), then that art product/financial instrument is a Commodity. Therefore art should be sold and regulated as a Commodity.

In fact, all Art Funds should be regulated with the (SEC) Securities Exchange Commission so that investors can see what art is being sold and who is selling it, who is buying the art and at what price. Full disclosure should be made also of the mysterious phone and Internet buyers, with whom an auction house can claim to be negotiating a private sale for an undisclosed amount. This type of Chandelier bidding and smoke and mirrors method of dealing should be illegal. By regulating Art as Stock, you would need a secondary Art Exchange to trade the original oil paintings, sculptures, silkscreen prints and giclées. This Art Exchange would bring more transparency to the art business and would regulate what is already manipulated by a handful of big collectors, dealers, museums auction houses, and galleries, even by some art critics who can influence and help decide to push a single artist to increase the “value” of a painting by 50-1000% in a single transaction. The collusion and back room deals that go on in this business are criminal by Wall Street standards.

The history of Art as Stock was originated back in 1994 by an American Artist, Robert Cenedella. Cenedella was the first artist to come up with the idea to sell Art as Stock – Stock as Art as laid out in “The Art of the Deal”, an article written in the New York Times Style Section, by Bryan Miller, on Sunday, March 20, 1994. Cenedella was calling then for regulating the art market. Here we are 20 years later and we are still trying to do the same thing but with more technology and transparency. The idea was 20 years ahead of its time. In the NYT’s article, Leo Castelli was quoted as saying that he compared the 1980′s art boom to junk bonds and that Cenedella’s idea was a “conceptual work of art” when it was really an investment in Art as Stock. Nobody really understood the concept then.

Cenedella’s idea made more sense already then than all the current ideas. The Regulation D Private Placement was registered with the (SEC) Securities Exchange Commission. The offering was 200 Shares of a Deluxe Limited Stock Edition. The concept was similar to an (IPO) Initial Public Offering. The company issued 200 shares of stock valued at $1,000.00 a piece for a total of $200,000.00. With each share of stock the buyers received a bank note certificate indicating part ownership in the oil painting as well as a large serigraph (a high quality silkscreen) of the original oil painting. This assured buyers full disclosure about what they were buying under SEC rules. The silkscreen picture “2001 A Stock Odyssey” was of the inside of the New York Stock Exchange. Each investor would share in the profit above the original cost of the painting priced at $50,000.00. So if the sale price should exceed $50,000.00 the profits would be distributed to the shareholders and the serigraphs would also go up in value. If you bought 100 shares you would own 50% of the original oil painting and 100 serigraphs, which the investor could also sell separately while still retaining ownership in the original oil painting. With each investment, buyers came away with a tangible piece of artwork, the silkscreen that they could hang on their wall.

This brings us back full circle and the question is does the art market continue business as usual or does Wall Street and the Art business both figure out how to regulate the investments in the art market so that there is full disclosure and transparency.

I can tell you right now that I would rather own a Picasso, a Thomas Hart Benton or a Cenedella than a share of Lehman Brothers, Bear Sterns or Enron. This may also one day be the same case for allot of the Contemporary Junk Art market.

The art market needs to be regulated because the way it is doing business now is just a crime.

Posted by NYC123 | Report as abusive