Art as an investable asset class

February 15, 2011

I sat down last week with Noah Horowitz and Marion Maneker to talk about art as an investable asset class.

It might be a bit hard to follow some of the subtext here, so let me try to spell it out. Essentially, if you look at the risk-adjusted returns on art, even taking at face value the improbable returns suggested by the biggest art indices, they’re not all that hot. Art is a negative-carry investment which pays no dividends, and as such it’s very risky. Its historical returns, on their own, don’t make up for that risk. So the people pushing art funds have tried a different tack, looking at the Capital Asset Pricing Model to come up with a way of saying that the risk-adjusted returns on art might not be all that great, but they’re uncorrelated, and that therefore they have a place in any efficient portfolio.

The problem with this argument is that the current art-market bubble, especially in contemporary art, has attracted so many hedge-fund managers and other financial types that art is now correlated, quite strongly, with various financial assets. The art market dried up very quickly during the crisis, and has come roaring back alongside the stock market as Ben Bernanke has continued to drop money from helicopters. The return of the art market and art values is great news for the art world and for art collectors, but it does rather put the lie to the idea that art supplies precious uncorrelated returns.

As such, it still doesn’t make any sense to invest in art as an asset class. Buy art because you love it, by all means. But don’t kid yourself that you’re making a sensible financial investment, because you’re not.


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