Art as a really alternative investment

11Oct05

James Surowiecki, author of The Wisdom of Crowds, writes in the New Yorker the rise of fine art investment funds.

Art investment funds represent something of a revolution in the relationship between art and commerce. Art collecting has traditionally been the domain of wealthy individuals in search of rewards beyond the purely financial. (The economist John Picard Stein once quixotically tried to quantify these intangible rewards, deciding that they were equivalent to a return on investment of 1.6 per cent a year.) The new funds, by contrast, allow people with smaller bankrolls to play the art market by pooling their resources, and the only benefits are economic, since investors don’t get to hang the paintings on their walls. In this scheme, art is just another “alternative asset class,? like gold or wheat.

This “asset class” has been legitimized to a degree by a couple of academic studies showing that art has significantly outperformed bonds and has kept pace with equities. Not surprisingly these studies find that the returns from art are not particularly correlated with the overall capital markets. You can read the Jianping Mei and Michael Moses paper “Art as an Investment and the Underperformance of Masterpieces” here.

However just because an art fund is possible, does not necessarily make it a smart investment. Any art fund is going to have a number of expenses that will reduce the funds’ overall returns. In addition, the fund managers will undoubtedly not be working for free. To Surowiecki this rush of funds is a sign of a market top, “So the headlong rush to invest in art looks more like a fad than like a rational approach to making money. In some ways, it resembles the boom in Internet stock funds that swamped Wall Street in 1999, when investors were convinced that the only direction was up.”

A more reasonable approach to the art markets requires a little thinking outside the box. What organizations always profit from a boom in the art markets? Answer – the auction houses: Christie’s and Sotheby’s. Sotheby’s Holdings (BID) is a public company. While it has had a rough go of it over the past few years BID may be a worth a look, before diving into any of the new wave of fine art investment funds.

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5 Responses to “Art as a really alternative investment”

  1. Great article, yet I think that a third very important option was left out. Directly buying fine art such as paintings and sculpture and photographs, being the primary mode of investing in art, apparently seems like a third world to investors. It does not have to be as difficult as you believe and anyone that can adequately advise you on a good art fund could and should be able to advise you on actual works of art to invest in. Yes, it will take a bit more time and research, yet this method of investment will yield you several more positive results than merely investing in Sotheby’s stock or an art fund. Primarily you will have the object that you havew invested in in your posession, giving you the control of the future of that object and not a bank or auction house which could always make decisions on the object which you are not in agreement with, or which may de-value your investment. Second, you will have a piece of art to enjoy and display in your office or home. Many these days are buying art, and without ever even seeing it storing it in a vault and selling it 10 years down the line, basically using it as a bond. yet art doesnt have to be solely a financial investment, it can be a cultural investment also which will not only provide you with a new form of entertainment yet will expand your cultural horizons as well as our financial.


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