Investing in Art with a New Kind of Tokenized Fund
How Tokenized Art Can Diversify Portfolios
Originally published October 4, 2022.
Last week, Artory and the Winston Art Group (in a joint venture) launched a new, diversified art fund to broaden access to fine art as an alternative investment. The fund is the first tokenized art fund on Polygon and represents an evolution in investing in art. By enabling potential liquidity in an illiquid market, tokenized art funds are endeavoring to democratize access to an exclusive asset class. Here’s how it works.
Tokenization is the process of issuing and managing digital asset securities on the blockchain. A big benefit of tokenization is that it enables alternative assets like fine art to be accessed and directly owned by a broader base of investors. Through tokenization, accredited investors can now buy, own, and sell digital asset securities representing fine art.
Fine Art by the Numbers
Fine art has long attracted investors with a keen eye for diversification. Why? Art is an historically uncorrelated alternative asset which tends to perform well even during economic uncertainty and market downturns. This makes it possible to diversify investment portfolios with fine art. While possible, it’s still important to acknowledge that regulatory, market, and liquidity risks exist when investing in new products, including tokenized art funds.
In 2021, dealers and auction houses hit an estimated $65.1 billion in aggregate sales of art and antiques. This figure is up by 29% from 2020 and surpasses 2019’s pre-pandemic numbers — Ocula.com — March, 2022.
While this non-correlation can be attractive to potential investors, physical artwork still tends to be illiquid and difficult to trade. Selling fine art typically requires finding a buyer through an art dealer and/or selling at auction. With tokenized art funds, shares of fine art can be sold online through secondary markets after a one-year lockup period. This relatively short-duration lockup enables a two-sided market to emerge with potential liquidity available after one year.
Introducing Tokenized Art Funds
As an actively managed closed-end fund, the inaugural Artory and Winston collection represents approximately 65 tokenized works of art. It also represents a new way for accredited investors to gain diversified exposure to an uncorrelated asset class that has historically outperformed the S&P 500 for the past 25 years.
The tokenized art collection comprises blue-chip, mid-career, and emerging artists hand-selected for the fund.
Each art piece is tokenized and automatically fractionalized so that an individual piece of art can be represented by multiple shares. This way, shares representing different tiers of artists can be combined to create a unique, diversified art fund. Additionally, tokenization makes ownership immutable so that the fine art which investors purchase is theirs and theirs alone.
Repeatable, Regulated Fund Structure
Over the past decade, Winston Art Group has appraised an average of $10 billion worth of art annually, with a cumulative value of approximately $70 billion. This sustained track record paints a picture of repeatable success and opens the door to future funds using a similar structure. How?
The fund is structured using a combination of Regulation D 506(c) and Regulation S. These securities exemptions enable businesses to offer tokenized shares of the fund to accredited investors. Whereas companies such as OpenSea and Tokend also offer ways to access tokenized art, each company’s tokenization structure differs. This is why choosing investments that prioritize compliance standards is important.
The Regulation D/S fund structure gives accredited investors access to tokenized offerings such as fine art collections that would otherwise be extremely difficult to invest in on one’s own.
With this new kind of tokenized art fund, investors and collectors alike now have an opportunity to get exposure to approximately 65 artworks sourced by experts in a single investment. What’s more, the way the fund is structured is both regulated and repeatable.
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