ART FUNDS: AN INTRODUCTION
Art funds are generally privately offered 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 or by an advisory firm who receives a management fee and a portion of any returns delivered by the fund.
The first institutional investor to specifically allocate capital for the purpose of investing in art is considered to be the British Rail Pension Fund (the “BRPF”), having acquired about 2,500 artistic tools during the 1970’s for a total cost of about $70 million USD.
Institutional investing in art works has evolved since the 1970’s, resulting in the emergence of more and more funds exclusively dedicated to this asset class. The collapse of the dot-com bubble in 2001 also fueled the art fund trend as investors looked outside of the market for alternative opportunities.
This trend of looking towards alternative assets was seen again following the financial crisis of 2008, as investors increasingly focused on tangible assets and alternative types of investment opportunities. Shortly thereafter, 2010 saw record sales of art works at both Christie’s and Sotheby’s, which further demonstrated the potential offered by fine art. More recently, in 2014 the global art market reached the highest level ever recorded, a total of over €51 billion.
The unifying factor of all art investment vehicles is their focus on the art market, which is characterized by a lack of regulatory authority, the non-transparency of the market and the subjective value and illiquid nature of fine art. Proponents of art investment funds argue that it is these characteristic that generate the significant arbitrage opportunities within the market that seasoned art professionals can exploit for the benefit of the fund’s investors.
Most art investment funds are administered by a professional investment management firm that is usually comprised of a mix of experienced art market professionals and professional investment advisors from more traditional hedge or private equity funds. Such a pairing is essential to avoid many of the pitfalls inherent to managing an art fund –namely either a lack of experience in the ins and outs of the art market or in managing an investment fund. Hedge fund managers will likely view art as an asset like any other to be traded and sold without having the background to identify works with the potential for price appreciation or the ability to gauge their authenticity or condition. Likewise, a former gallery owner or art dealer would likely be overwhelmed by the intricacies of raising money for, and administering, an investment fund.
Sources : Art Fund Association – Center for art law