Art as Investment: A Brief Overview

For those unfamiliar with art investment, or for those wanting a refresher.

In the 1970s and 1980s collecting art was different from investing in art. But in the 21st century, the two worlds have now collided. No longer is the collecting of art just a mere hobby. Rather, it has become a way to balance portfolios and diversify one’s assets. Indeed, many financial advisers now define art as a long-term profit.

Should investing in art be a route one wishes to take, there are now art investment advisors. Googling the term “art investment advisor” brings up, for instance, a list that includes (at the time this article was published) the “Top 14 Art Investment Advisor profiles” on LinkedIn. There are fine art wealth management groups as well as art advisories that provide art market analyses. Besides analyzing art market trends, they track auction houses, curators, and galleries.

Financial careers tailored to investing in paintings, drawings, prints, and sculpture are now a reality. Art research advisors now cater to cultural institutions, family offices, and private art collectors. Not surprisingly, there are now Art & Finance reports that are published to inform investors of the art market and art wealth management industries.

One of the most respected is that authored by Deloitte Luxembourg with research firm ArtTactic. The Art & Finance report 2016 press release stated, “78 percent [of wealth managers] think that art-related services should be included as part of their wealth management services…For the first time since the launch of the report in 2011, there seems to be an alignment of the wealth management industry with collectors and art professionals, with 70 percent and 77 percent respectively also recognizing this need.”

Artworks are even bought and sold by vehicles similar to hedge funds. These art hedge funds are marketed exclusively to the affluent who wish to have partial ownership of fine art. The investor capital is pooled together to buy and sell fine art, all for the purpose of sharing profits. Returns are delivered via the appreciation and re-sale of underlying assets — paintings, sculpture, photography, video, art prints, and drawings. One of the perks of being an art hedge fund investor is the opportunity to borrow artworks from the fund to hang them in homes and offices. Consider The Collectors Fund in Kansas City, Missouri. It has an Art Rotation Program wherein “members enjoy a ‘private museum’ — the remarkable experience of world-class art exclusively in the comfort of their homes.”

The first recognized art hedge fund was AIA, which was launched in 2007. Minimum investment into AIA’s fund was £100,000. According to the Financial Times, AIA’s fund “aimed to buy artwork in the lower to middle market range, paying up to £1m, while shorting 10 to 15 different economic indicators and securities that the directors believed exhibited a 96% correlation with the art market.”

And while the global art funds, as reported by the Financial Times, collapsed by about 40% following the Lehman Brothers bankruptcy, art hedge funds are once again on the rise as the economy continues to become robust after the Great Recession. The Art Fund Association LLC, for one, was founded in 2009, and as its website explains, it was created to “shape the dialogue, business practices and growth of the art fund industry by providing a forum where leaders, investors and practitioners in the global art fund industry can come together for the advancement and promotion of art investment vehicles.”

Art funds are appealing because they offer diversification. London’s The Fine Art Fund Group is purportedly the largest player in the market at present, but there are others in Russia as well as Asia, especially China, that are close at its heels.

The Fine Art Fund Group’s CEO, Philip Hoffman, had this to share, “We have seen huge interest from clients who are interested in having their eggs in 20 baskets as opposed to three.” Hoffman imparted that most of the fund’s clients allocate a minimum of 5 percent of their wealth to art, although some have allocated upwards of 20 percent. “After 2008, investors got burned [by being under-diversified].”

Art & Finance reports echo Hoffman’s assertion. Earlier this year, Deloitte Luxembourg and ArtTactic documented that “73 percent of the wealth managers surveyed in 2016 (up from 58 percent in 2014) said their clients wanted to include art and other collectible assets in their wealth reports in order to have a consolidated view of their wealth.” Simultaneously, about “88 percent of family offices and 64 percent of the private banks surveyed said estate planning around art and collectibles is a strategic focus.”

Adriano Picinati di Torcello, Deloitte Luxembourg’s Art & Finance Practice Director, added more insight when he said that the capital value of art is what drives wealth management services’ attention: “The key interest is not the investment or yield-seeking aspect of it; rather, it is more the preservation of the capital allocated to art and collectibles. 72 percent of art collectors around the globe buy art for passion with an investment view…22 percent of the collectors surveyed buy art only with the aim of collecting. Although the emotional value remains their primary motivation for acquiring art, the financial component should not be underestimated.”

But there’s a dark underbelly to the financial world of fine art. Deloitte Luxembourg emphasizes that “The US art-secured lending market is growing significantly with an estimated loan book size of between US$ 15 billion and US$ 19 billion.” And, under the Uniform Commercial Code (UCC), art collectors can keep possession of artworks even though their loan is still outstanding. What’s more, Deloitte Luxembourg warns, “The majority of wealth managers, arts professionals and art collectors believe that threats to the art market are best addressed from within the art industry itself rather than through government intervention.”

Consequently, CNBC has described art investment funds as “a bit like the Wild West. They’re unpredictable, largely unregulated and dominated by speculators.” Unfortunately, because the market runs in the billion dollar niche, CNBC continues, “…the sector has been getting attention by the well-heeled from all parts of the world.”

An unregulated industry that involves a lot of capital seems like the next ticking financial bomb. Deloitte Luxembourg elaborates, “The art market [should] increasingly [be] under scrutiny for the apparent lack of regulation…76 percent of the art professionals surveyed are in favor of a self-regulation of the art market. 62 percent of wealth managers said that the unregulated nature of the art and collectibles market remains the biggest challenge for incorporating art in their service offering.”

And, just what are those areas that remain unregulated in the art industry? Deloitte Luxembourg itemizes some of them, “These concerns notably include price manipulation, conflicts of interest, lack of transparency, and secret commissions, with nearly three out of four wealth managers, collectors, and art professionals sharing these views. There is clearly strong awareness and agreement on what the problems are, what is less obvious is how to best address these in a coherent and coordinated manner.”