Are art investment funds the right choice for average investors? Here’s what you need to know before you start looking for funds.
Like many savvy investors, you’re looking for ways to diversify your portfolio—outside of the stock market. And like many average investors, you’re now turning to the world of alternative investments, once the playground of the ultra-rich and institutional investors. But you also want to invest in something you love, which is why you’re turning to art investing.
Art has significant potential value as an asset—the blue-chip art market, for example, has outperformed the S&P 500 by 180% from 2000 to 2018. Of course, since your name isn’t Bezos, Gates, Musk, or Koch, you’re also looking for ways to invest in art that don’t involve spending every dollar you’ll earn in this lifetime, which is why you’re looking into indirect options like art investment funds.
What are art investment funds, and are they the right choice for average investors? Here’s an overview to help you decide how to spend your investment dollars.
According to the Art Fund Association, art funds are private investment funds dedicated to generating returns for investors through the purchase and sale of art. Such funds are run by a professional art investment management firm or a professional art investment advisory firm, which collects a management fee and a portion of the returns delivered to the fund.
Art funds are a young asset class—they only started showing up around 2008. Because of this, art funds are highly diverse.
Basically, the underlying characteristics of a fund depend on the fund in question. In general, all art funds use some variation on a buy and hold strategy (like what we use here at Masterworks). However, what this means (and the strategies used to execute it) depends on the fund in question. It also depends on the size of the fund, duration of the strategy, the fund’s unique investment focus, the fund’s preferred investment strategies, and portfolio restrictions unique to that fund.
The easiest way to think of them is like hedge funds, which are essentially only limited by their mandate. They can use just about any strategy that suits the manager’s fancy (or investment experience). The key difference is that art funds focus exclusively on art.
Art funds have become more popular among certain investors—such funds are one of the four main ways for investors to get involved in art as an investment asset. These funds carry a few advantages over other strategies.
If you’ve tinkered with art investing for a while now, you’ve already learned that the art market is nothing like the stock market. It’s smaller, much more exclusive, and relies on its own rules.
Unlike the stock market, which any publicly traded company participates in, the art world is comprised of a small collection of people. Three categories, actually: artists, buyers, and middlemen (dealers, gallerists, auction houses, and art fairs, the latter of which is populated by dealers and gallerists). The middlemen interface directly with the artists (or art sellers) and the buyers, which means relationships are much more personal than stock sales.
Also, unlike the stock market, trading on non-public information is how you generate returns. In fact, it’s common practice for sellers to use market-moving information (like an artist’s upcoming museum show) in order to turn a profit. In stock markets, that’s called insider trading, and it’s illegal. In the art world, it’s both legal and routine, which means you need access to the inner echelons of the market in order to navigate it successfully.
A critical benefit of art funds is that they handle these interactions on behalf of their investors. Because the fund brings those relationships to the table, you don’t need to invest the time and resources in building them yourself, and since art funds have more money to bring to the table, it’s easier to motivate middlemen to share their market-moving information.
Oh, and because art funds bring these relationships to the table, you don’t need to worry about the flipside—selling art for profit once you’ve purchased it.
Like buying stocks, buying art is easy. Unlike stocks, selling art is hard. Galleries are reluctant to sell work they’ve sold before if they can make profits on new work by the same artist, and auction houses are only interested in proven names (that’s where the best profit margins are) so out-of-favor and up-and-coming artists may not get the time of day.
In other words, it’s a headache to sell art, even if it has appreciated in value, and the only way to do it is by having art world relationships to negotiate the sale.
Because art funds already have these relationships, they already have the means to negotiate for art sales. That takes the stress and pressure off investors, who can just collect their dividends without worrying about how they got that far.
Last but not least, art funds offer greater control over what you invest in (more so than stocks, anyway).
In an art fund, you won’t get a choice in what art gets purchased—if you want to pick and choose your own collection, you’ll have to build it yourself. You won’t get a chance to view purchased art either (in order to preserve the art for sale), though at least one fund, Artemundi Global Fund, allows investors to take turns displaying art in their homes. Art funds do their homework on artists most likely to produce good returns for investors and focus on buying those works.
However, unlike other pooled investment funds—or even stocks, for that matter—you get to choose the asset you invest in.
Here’s the catch: art investment funds are a lot like the Wild West…or hedge funds. Actually, when you think about it, art funds are almost exactly like hedge funds: they’re largely unpredictable, largely unregulated, and dominated by a class of speculator investors that closely resembles hedge fund clientele (very niche, ultra-wealthy, and sophisticated enough or wealthy enough to swallow losses).
In plain English, art funds are strikingly similar to hedge funds that specialize solely in art. Like hedge funds, they’re private investments available to accredited investors—individuals allowed under federal securities law to participate in certain securities offerings because they have the financial sophistication to understand what they’re getting into, or at least, the financial sophistication (translation: wealth) to weather major losses without becoming destitute.
Because of this, art funds use minimum buy-ins comparable to those seen in hedge funds—think something to the tune of $500,000 to $1 million.
Also, like hedge funds, art funds are not heavily regulated. In some ways, they have less regulation than hedge funds, in that they don’t actually have public disclosure requirements, which means it’s not entirely clear how many art funds exist in the world or how those funds perform year-on-year.
That said, art funds are a very young asset class. They only started popping up after the 2008 financial crisis. It’s best to think of them like hedge funds, back when hedge funds were in their first two decades of development—managers are still figuring out how to structure them and how to run them successfully.
For now, at least, art investment funds aren’t the right choice for average investors, but there are still ways for average investors to get involved in the blue-chip art world. In fact, we’re on a mission to make it possible.
We’re the only platform that allows investors of all walks of life from all across the world to invest in multi-million-dollar works from artists like Banksy and Basquiat. We handle the research (with some help from Citi Bank and Bank of America) to identify high-growth artist markets with the best potential risk-adjusted returns. After we purchase a piece and file with the SEC, investors can purchase shares in a piece—for as little as $20 per share. Then, when we make the sale (three to five years on average), you collect your dividends. Ready to grow your portfolio with passion investing? Fill out your membership application today to learn more.
MasterworksMasterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.
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