This note considers fine art investment funds, a form of investment
that has arguably attracted more media and academic interest
It covers -
page - concepts, key issues and studies
- what does management of an art investment fund involve
- an examination of models for fine art investment funds
- examples of current and proposed fine art funds
- questions about practice in Japan and elsewhere
- a perspective on art investment funds by considering funds
for investment in classical musical instruments
- and funds for investment in coins, classic cars, books
investment funds as a perspective on fine art funds
- funds devoted to pop culture memorabilia and other exotica
supplements discussion in the e-Capital & Investment guide,
collectibles note and hedge fund note elsewhere on this site.
There is a long history of individuals and retailers actively
trading old master paintings, classical sculptures, ceramics,
coins, drawings, antique furniture and other upmarket collectibles.
Traditionally, however, there has been little interest in
operation of a commercial fund that invested in art works
rather than in shares, bonds or real estate and that provided
superior financial rewards for investors by trading those
That disinterest reflected questions of status and value,
for example notions that social elites were identifiable by
their capacity to disregard commerce and pursue connoisseurship.
Retention of what Thorstein Veblen
labelled 'useless' commodities, such as Roman marbles - in
contrast to useful assets such as agricultural and urban land
or coal mines that generated ongoing revenue - was a distinguishing
mark of the gentleman, a creature far superior to the mere
trader. (Traders were characterised as creatures of coarser
fibre, sullied by involvement in grubby commerce and concerned
to make as much money as quickly as possible, although of
course redeemable through marriage to one's genteel but poor
Disinterest also reflected the immaturity of the art market
compared to other opportunities for investment. Most simply,
investment in the stock market would provide wealthy individuals
and insurance companies or other custodians of wealth with
the desired liquidity, capital appreciation and revenue stream
(in the form of dividends and share splits).
From at least the 1850s academics suggested that it would
be possible to develop a fund for investment in fine art and
some enthusiasts formed clubs for purchase and sale of 'recognised'
paintings or new works by emerging artists.
One example was the pioneering La Peau de l'Ours
syndicate, discussed in the note on droit
de suite, which sought to both foster struggling artists
and reward syndicate members when Impressionism was recognised
as one of the glories of French culture rather than a product
of escapees from the Salpetriere.
Contemporary art investment vehicles (AIVs) emerged after
the 2000. Emergence followed "legendary" investment
in art by the British Rail Pension Fund (BRPF)
from 1974 to 1989. Emergence reflected several factors.
One was simply the increasing sophistication of part of the
investment community, accustomed to dealing with a range of
derivatives and able to conceptualise fine art and antiquities
as just another commodity that could be accurately valued
and readily traded in a specialist market.
Another was the availability of capital, with major institutional
investors and some wealthy individuals (who subsequently fuelled
the growth of private equity
funds and hedge funds) having
money at their disposal and being prepared to take risks in
diversifying from traditional investment portfolios that centred
on treasury bonds and blue chip stocks.
A third factor was the perceived failure of those portfolios
to keep pace with inflation, whether through capital appreciation
or through revenue flow. That perception interacted with a
recognition that supplies of some collectibles were clearly
finite (for example almost all works by some Old Masters had
moved off the market into museums) and that prices were showing
ongoing dramatic increases.
It was underpinned by increased access to information about
prices, with establishment of a range of fine art price indexes
and analysis purporting to show that substantial increases
were occurring irrespective of the quality or prominence of
The final factor, often not discussed in accounts of early
art funds, was the same generational change evident among
art museums, commercial galleries and auction houses, with
investment in art being seen as hip, 'sexy' - far more exciting
than speculation in pork bellies or copra futures - and even
In practice performance by the BRPF was not spectacular (as
discussed below the trustees might have got better returns
by investing in the share market) and resulted in more media
coverage than emulation. There were no major public funds
specialising in fine art and trading on a large scale, in
contrast to funds specialising in real estate or other assets.
Marketing by Merrill Lynch and Kidder Peabody of funds for
speculation in classical coinage ended in pain for the investors
and substantial losses for the promoters.
Easy money at the end of the millennium, coinciding with another
round of price increases in the sale of Old and New Masters,
saw renewed interest in art funds and upbeat announcements
for the prospects of over 23 funds based in Europe and North
High profile launches of specialist funds were not however
matched by large-scale follow through and as of late 2008
it is difficult to talk of an art fund industry that features
a range of players, clear benchmarks for performance and transparency
Art funds remain a curiosity. That is unlikely to change in
the immediate future, despite announcements in 2006 - as in
the 1970s, 1980s and 1990s - that "art is the newest
asset class" or the 'end of history' proclamation by
Tobias Meyer (Sotheby's head of contemporary art) that the
art market now goes in only one direction: up!
We live in a post-communist society. For
the first time since 1914 we are in a non-cyclical market.
what are art investment funds?
Art funds are investment vehicles that, like hedge funds and
private equity funds, exist to provide substantial commercial
rewards to two categories of people or institutions -
who provide the capital
that allows acquisition of the art
who manage the fund.
practice most managers draw on a range of advisers and specialist
service providers. The interests of those three entities are
not necessarily identical.
Although art funds deal with objects that may be described
in spiritual terms (eg "embodiment of the human spirit"),
may represent unique aspect of a nation or region's cultural
patrimony and may be considered 'priceless' those funds are
about money. They aim to maximise the rate of return on works
in their collection, subject to the rule of law.
They do not aim to hold those works in perpetuity. The period
of retention reflects the balance between -
by investors (some are more patient than others)
remuneration arrangements (some fund proponents have adopted
the private equity fund model, with managers gaining a percentage
of aquisition and sale prices in addition to standard fees)
of when is the best time to sell, ie to secure the maximum
profit on an item by item basis or fund basis
managers and investors expect to see substantial deacquisitions.
Sale of works acquired by a fund may occur progressively throughout
the life of a fund - with returns being useful in purchase
of works that will provide greater returns in future and in
securing participation by additional investors - or through
termination of the fund.
Regulatory frameworks are analogous to those of hedge funds.
Lower compliance costs for provision of capital by institutional,
corporate and wealthy individual investors has meant that
funds are not oriented to 'mum & dad' investors.
That orientation also reflects administrative costs. It is
easier to get capital from a small number of rich investors
than from a large number of poor investors; rich investors
are more likely to be patient and thus not burden the fund
operator with costs through short term departure from the
fund. As a result proposals for art investment funds have
centred on provision of capital by a single entity (the BRPF
model) or by a handful of investors.
It is common to see claims such as
property and shares, quality art is largely insulated from
the volatility of investment markets providing vital diversification
when markets are falling. The art market is considerably
less volatile and is less sensitive to economic crises and
geopolitical events than other assets. Compared to many
alternative investments, art also involves low transaction
and holding costs.
Chanin more perceptively quipped in Collecting Art
(Roseville: Craftsman House 1990) that
statement that 'Art is a good investment' usually means:
'Some works of art have been a very profitable speculation'
Hughes commented in 2008 that
of the things that sustains the art market is an irrational
faith in a continuous rise in prices. There was a 17th-century
Italian painter called Guido Reni. Not a lot of people have
heard of him but in the late 18th century many connoisseurs
thought that Italy’s two supreme artists were Michelangelo
and Reni. But by 1950 you could buy a 10ft painting by Reni
for £300. People fall out of fashion quite rapidly.
So this idea of the inviolability of the modern art market
is a fantasy.
discussed elsewhere on
this site, owners of particular art works and other collectibles
(including stamps, rare coins, vintage cars, literary manuscripts
and even exotica such as the four pair of ruby red slippers
worn by Judy Garland in The Wizard of Oz) have seen
substantial - even staggering - increases in prices that other
consumers are prepared to pay for those assets. Appreciation
of ten times the initial price, or one hundred or even a thousand
times, is not uncommon for canonical works.
It is clear, however, that
all works have appreciated at the same rate
paid for canonical works rise and fall in the short term,
with for example slumps
in the price of Impressionist and modern masters during
the 1980s after the collapse of the Japanese property bubble
and the 1987 stockmarket crash in Australia and elsewhere
rise and fall in the long term as works move in and out
of the canon. Prices paid for Pre-Raphaelite works, for
example, dived after the 1890s and only recovered substantially
from the 1960s onwards. Despite the efforts of collectors
such as Evelyn Waugh and Andrew Lloyd-Webber in real terms
those paintings have never reached their pre-1900 peak.
for some works has a geographical basis, reflecting market
sophistication (Robert Hughes' tart dismissal of Japan's
"weakness for yucky little Renoirs and third-string
Ecole de Paris painters") or national cultures (Hans
Heysen isn't part of the national myth in Thailand, Germany
or the US)
maintenance and trading costs are tangible (expertise is
expensive and is required because information about the
market is thin, auction houses or dealers take 10% or more
of the price, there is no dividend or rental stream to offset
storage and insurance costs)
are influenced by factors such as interest rates, inflation
rates, endorsement by scholars and institutions, and 'behavioural
finance' (ie perceptions that prices will rise steeply and
with low risk, encouraging speculation)
major financial institutions have been markedly more cautious
about art or antiquities based investing, influenced by
the experience of their peers and lack of interest among
many of their clients
works are forgeries, misattributed or lack good title (UK
arts supremo Lord Gowrie reportedly quipped "At least
in investing in art, you won't get an Enron or a Marconi"
but some leadeing institutions and individuals have however
found that they are stuck with a van
Meegeren, a de Hory or a work affected by a spoliation
is also clear that although the market value of particular
art works increases, the market value of other assets often
increases at a greater rate in the long term.
Buying a Picasso or Leger oil in the 1950s would produce a
respectable profit when that painting was sold thirty or fifty
years later. The same sum, however, would have generated a
better return if invested in Xerox or IBM, particularly if
the investor was not passive and migrated to another growth
stock when the price of Xerox and IBM declined.
The studies by Moses & Mei noted
elsewhere on this site suggest that over the past half century
US shares (represented by the S&P 500) returned 10.9%
annually: art returned 10.5% per annum. Exceptional profits
are dependent on fortune and selection of what proves to be
a winner in the medium term. Moses & Mei discount transaction
costs, which can be up to 20% of the sale price.
From the perspective of purchasing
power - what a dollar, guilder, krona, franc or pound
could buy in 1850, 1890, 1920, 1970 and 2006 - the prices
paid by Gilded Age moguls for works by Romney, Makart, Friant
or Bouguereau will never be fully recouped. Will works by
Juan Davila, Emin, the Chapman Brothers, Hirst, Schnabel and
Koons retain their value?
There has been little major writing on art investment funds
and in particular there is no independent monograph.
Salient works include Peter Cannon-Brookes' 'Art Investment
and the British Rail Pension Fund' in 15(4) Museum Management
and Curatorship (1996), the HBS study Fernwood Art
Investments: Leading in an Imperfect Marketplace by Boris
Groysberg, Joel Podolny & Tim Keller and the 2007 'Art
as an Alternative Investment Asset' by Raya Mamabarchi, Marc
Day & Giampiero Favato (here).
For questions of valuation and returns see the discussion
of pricing and valuation in the Collectibles
note elsewhere on this site. It points to major works such
Goetzman's 1993 'Accounting for Taste: An Analysis of Art
Returns Over Three Centuries' in American Economic Review
83 (5) and 'Reflections on historical series of art prices:
Reitlinger's data revisited' by Guido Guerzoni in 19(3)
Journal of Cultural Economics (1995) 251-260
Value: or Art Investment as a Floating Crap Game' by William
Baumol in 5 American Economic Review (1986) and 'On
pricing the priceless: Comments on the economics of the
visual art market' by Louis-André Gérard-Varet
in 39(3) European Economic Review (1995) 509-518
Jianping Mei & Michael Moses' 2002 paper (PDF)
'Art as Investment and the Underperformance of Masterpieces:
Evidence from 1875-2002'
William Grammp's Pricing the Priceless (New York:
Basic Books 1989)
Jean Picard Stein's 1977 'The Monetary Appreciation of Paintings'
in Journal of Political Economy 85
Orley Ashenfelter & Kathryn Graddy's 2003 'Auctions
and the Price of Art' in the Journal of Economic Literature
Higgs & Andrew Worthington's 2005 'Financial Returns
and Price Determinants in the Australian Art Market, 1973-2003'
in Economic Record 81
Campbell & Joshua Pullan's 'Diversification into Art
Mutual Funds' in Diversification & Portfolio Management
of Mutual Funds (New York: Palgrave 2006) edited by
Ralevski's 2008 MBA dissertation Hedging the Art Market:
Creating Art Derivatives
Campbell's 2005 paper
'Art as an Alternative Asset Class'
Don Thompson's The $12 Million Stuffed Shark: The Curious
Economics of Contemporary Art (London: Aurum 2008)
'Winning the Art Lottery: The Economic Returns to the Ganz
by William Landes (1999)
International Art Markets and Management (London: Routledge
2005) edited by Iain Robertson.