Art market machinations

14May07

Felix Salmon at Market Movers reports on the imminent “launch” of an art-focused hedge fund, the Art Trading Fund. He is skeptical that a fund with a shorter-term focus will be able to make a profitable go at it. Salmon does think he has a better idea:

I’ve got a better idea for Carlson, who seems to think that he can replicate art-market returns in the options market: create a tradeable instrument which mirrors the art market. If it works, I think there could be a lot of demand for it.

There is something to this idea. On need only look at the ETF marketplace that is awash in funds that seek to replicate the returns to novel asset classes. Some of them are truly novel, others not so much.

We are not new to the art as an investment beat. One of our earlier posts was on the topic of art as a really alternative investment. More recently we discussed the concept of proxy investing. In that post we noted how Sotheby’s (BID)* could act as a proxy for the health of the art market. (Speaking of which check out the performance of Sotheby’s stock price over the last two years.)

The premise is pretty simple. As fine art prices rise and the volume of transactions increase, Sotheby’s commissions should rise. Hedge fund honchos, and their ilk, have become big collectors in the fine art market of late putting upward pressure on prices. On the other hand, prices and volumes can (and will) fall at some point putting pressure on the Sotheby’s bottom line.

There are no guarantees in the capital markets or the art markets. Sotheby’s is by no means a perfect proxy for the art market.  However, sometimes there are simpler ways of playing trends without paying today’s standard hedge fund fees of “2 & 20.”

*No position in BID.

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