It has become fashionable to knock art funds. Critics point to the many funds that have failed to launch; the structural reasons why art is a bad asset class; and argue that the art funds are overhyped.
The first argument forgets that very few hedge funds make it to launch. Many financiers want to run funds but most fail to find enough investors. Art funds do tend to attract extroverts who announce early, but the success rate with hedge funds is similar.
Whilst it is easy to list the attributes that make art a difficult investment – transaction costs, fraud, insider knowledge and everything else – these actually reward experts. If you talk to old futures traders they look back to when exchanges were less efficient. Art is one of a few global markets which rewards true experts. Ironically, the biggest weakness of an art fund is the cost of regulating themselves.
It is fair, however, to argue that art funds have been overhyped. But that is not the fault of the funds that are active today.
Google the term “art fund” and you get 445,000 results. This is a lot for an asset class with less than $1 billion of assets under management. Do the same for “infrastructure funds” – of which there are hundreds, investing hundreds of billions of dollars, – you get just 40,000 more results. This just tells us that art funds are more exciting than investing in sewers (you knew that already).
The exciting thing is that funds – like The Fine Art Fund and others – now have a track record and have shown that art funds can provide good returns. Several firms are now working on their second funds.
There will probably be a lot of articles about these – and cynics will be able to claim about markets being overhyped – but anything involving art gets a lot of attention. If you search “Democratizing Art” you get 39,800 results. “Democratizing North Korea*” gets just 993 pages.
(*Please don’t hack us.)