Art Funds: The Newest Art Market Participant

The art market has traditionally been composed of three primary players: art collectors seeking to purchase works for personal collections, museums and cultural institutions acquiring works for the benefit of the viewing public, and art dealers seeking to build and manage their inventories.

In the last eight years, a new art market participant has emerged in the form of art investment vehicles commonly known as “art funds.” Spurred by recent returns on the art market and by general economic problems that have cast doubts on traditional investments and on the stability of national currencies, art funds have flourished. There are approximately 45 such funds in existence today managing just under USD one billion of art assets, with numerous additional funds currently in development. Asia in particular has recently seen the launch of many new funds, which are generally larger than their Western counterparts.

WHAT ARE ART FUNDS?

Art funds are 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 firm, which receives a fee and a portion of any returns delivered by the fund. Art funds are offered privately to sophisticated and financially capable investors and are not open to investment by the general public. The underlying characteristics of art investment funds are diverse and vary from fund to fund, in particular with regard to the following:

Size: Unlike more traditional investment funds, art funds have generally been smaller in size, ranging from as low as USD 10 million to as high as USD 100 million of investment capital. The size of an art fund is typically related to the particular period(s) of art that the fund will invest in.

Duration: Art funds are generally structured to have a fixed operating term, with predefined time frames for making art acquisitions (usually three to four years from the launch of the fund) and for selling off the fund’s art portfolio (usually five to seven years from the launch of the fund). Recently, the possibility of open-ended funds with perpetual existences and investors able to enter and withdraw at regular intervals has been explored by various art fund managers.

Investment Focus: The first art funds were fully diversified, covering works of art across most of the primary art markets, such as Old Masters, Impressionist, Modern and Post-War, and Contemporary. In utilizing such a diversified investment approach, such funds spread their capital among many different markets, seeking to minimize the impact of adverse changes in one particular market. However, over time, the industry has seen the development of funds that focus on a single segment of the market in which the manager has particular experience, such as American art or Chinese contemporary art. 

Investment Strategies: While all art funds utilize some form and degree of a traditional “buy and hold” strategy, art funds can differ drastically in terms of their investment strategies. Whether making co-investments with other art market players, focusing on sales by distressed sellers or making bulk purchases from artists or their estates to secure better pricing, art fund managers employ more than one strategy simultaneously to realize gains continuously, switching between strategies to reflect trends in, and capitalize on, available opportunities in the art market. 

Portfolio Restrictions: Each art fund adopts a set of restrictions that governs the character of its art portfolio. Examples include limitations on how much of the fund’s capital can go into works by a particular artist, into a single work of art or into specific periods of art history. 

Despite their differences, 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 nontransparency 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. 

HOW DOES THE ART MARKET VIEW ART FUNDS? 

To date, the art market has generally viewed the emergence of art funds with distrust and opposition, most of which arises from a combination of individual, high-profile failures among early art funds (for instance, Fernwood Art Investments) and a lack of understanding about art funds and the ways in which they operate. 

Art fund critics tend to brand art funds as “flippers” or “market manipulators,” when in fact most art fund managers employ long-term investment strategies and work with galleries in protecting and supporting the market for those artists’ works that they acquire. In many cases, art fund managers hold their artworks for periods far exceeding those of the prominent collectors who are traditionally favored by the market. Art funds have even served to provide much-needed funding to contemporary artists seeking to produce their next large-scale series of works.

Moreover, art funds pride themselves on adopting comprehensive exhibition programs for acquired artworks, which serve to showcase them for the benefit of the viewing public, a trait that is not always shared by private collectors.

WHAT DOES THE FUTURE HOLD FOR ART FUNDS?

The art fund industry is still in a nascent stage and is continuing its efforts to convince both the alternative investment community and the art market that it can produce attractive returns for its investors while supporting the market in which it participates. As the industry continues to grow, it is important for art fund managers to engage with the broader art market in order to correct any misperceptions in the market and establish in no uncertain terms that art funds are here to stay.