Does investing in art funds make sense?

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The logic behind art funds really relies on three simple facts: first, good quality art (usually) goes up in value; second, the art market is inefficient, so experts should be able to find opportunities; third, because the art market is separate to other markets, it offers investors some diversity. All of this is true.

Everything that makes art a difficult asset class to invest in – lack of pricing data, forgeries, no-fundability, insider information, volatility and everything – means that true experts have an edge and should be able to generate a return.

Art fund numbers

 There are really two types of funds: formally regulated art funds and informal ones. An example of an informal art fund would be a group of friends that get together to try to spot emerging artists. They all put in some money and buy art, planning to sell it at a later date. Dealers have done this for many years. It is difficult to track formal art funds, even though they are regulated, although Deloitte and ArtTactic do a good job in their annual Art and Finance report.

It is impossible to track the informal art funds – and these are not included in the figure. Some funds fit between the two categories.

Whenever you read about art funds you typically come across two case studies: Andre Level’s Peau de l’Ours (or Bearskin Art Club), an informal fund that closed in 1914, and the British Rail Pension Fund, which launched in 1974, one of the first formal funds.

Must read: Three key examples of art funds  – Peau de lOur’s, British Rail Pension Fund and The Fine Art Fund

The formal art fund industry is a small one. In June 2014, Deloitte and ArtTactic “conservatively estimate” that there were just 72 art funds in operation. Of the 72 funds it identified, some 55 of these are Chinese funds. The total assets under management by art funds is also down from $2.13 billion in 2012, mainly due to Chinese funds closing down. The Chinese funds are very difficult to track and exist under different regulatory regimes. In 2009, India dominated the number of funds in a similar way.

Deloitte and Art Tactic estimate that non-Chinese funds have just $417 million of assets under management.

Global Art Funds and assets under management. Source: Deloitte and Art Tactic
Global Art Funds and assets under management. Source: Deloitte and Art Tactic

Have art funds failed?

Since the 2008 credit crunch it has become fashionable for people to question the whole concept of funds. This is largely because they were ridiculously over-hyped before then.

If the number of articles, conference sessions and general hype celebrating art funds had translated into actual funds, it would be a much bigger market. In reality, the art market is not large enough to sustain lots of large funds. Dr Clare McAndrew of Art Economics and the author of TEFAF’s annual art market forecast estimates that the art market was worth $67 billion in 2013. In theory, more funds would also mean that the art finance market would become more efficient and reduce returns for other funds (this is a long way from happening).

Good funds need managers that can understand, and be part of, both the finance and the art worlds. This means that very few teams can actually launch one. Unfortunately, lots of people think they are qualified and are seduced by the glamour of running an art fun (people who work for an art fund say it is not as glamorous as it looks).

The 40-year history of art funds has seen many people loudly announce the launch of funds and then fail to launch one. It is, however, worth putting that into perspective. A lot of hedge funds also fail to launch. And a lot of hedge funds and mutual funds also fail once launched. It is totally unrealistic to expect every art fund to make money.

The age of art funds will arrive

 The art fund market will never be a huge one, but it would be wrong to write them off now. Although it is 40 years since British Rail launched its fund, the modern age of art funds only really started in 2000. It was always going to take time to prove the model. Funds that have launched since then now have a track record, so we should see more interest in the sector.

The logic behind art funds makes sense. There is a definite place for them. We just need to make sure that the market is not overhyped again. The challenge for investors is to pick the right one.