September 6th, 2008

Kirk Tatom “The Wake of Day II,” Oil

It is my belief that collectors naturally gravitate towards, and should only buy, what they truly love. That said, there are always great buys and steals in the emerging art market on both local and national levels. As well, there are many investment opportunities in the high-end contemporary sector, but most of those are out of the average collector’s reach and beyond their art educations. As there is a continued demand for both contemporary and historically important works, fine art can now be treated as an alternate asset class and a way to diversify wealth. If you can afford to research the markets and buy and sell with the appropriate tides, by all means forge ahead!

For those of us with a little less dough to invest in stratospherically-priced contemporary art, there are other ways invest. The Mei Moses Annual Art Index shows that art delivered an annual compounded return of 12.06 percent between 1953 and 2003. The indexes are based on databases of more than 12,000 artworks bought and sold at auction more than once. These indexes are then compared to the S&P 500, government bonds, and gold to decipher relative performance. My advice? Start small, set annual amounts for art investment, and talk to galleries about their top emerging artists. If you start your collection in 2008 with a $1500 investment, and you invest 25% more in your art collection each year for 20 years, in 2028 you will have a $37,500 art collection. Match that to return of the Mei Moses index and you’ll have a $42,022 art collection!

Another art investment idea that fascinates me is the art hedge fund. Both the Fine Art Fund (FAF) and the Art Trading Fund (ATF) are based on the idea that private collectors don’t rely on credit (and thus are not affected by the credit crunch). The FAF and the ATF have differing ideas of where and when to invest, with the ATF (born in 2007) trading on average every 4 months. Investors in both hedge funds aren’t necessarily art lovers; they just know a good fund when they see one. The ATF website says that they use, “an objective investment process the Fund essentially monetizes the substantial margins of a gallery and art dealing business – without the high fixed cost base of either – and passes that ‘alpha’ on to the end investor. The investment managers add additional value through asset allocation and via a synthetic hedge that provides downside protection.” They primarily focus on living young, upcoming artists’ works for quick sell back. Charles Saatchi, the British advertising magnate, art collector, and gallery owner is an adviser.

Another obvious connection of hedge funds to the art world: many of the hedge fund managers like Steven Cohen of SAC Capital (and owner of a tiger shark in formaldehyde, a work by the artist Damien Hirst) and Citadel Investment Group’s Kenneth Griffin, are among the top art collectors in the world. According to a 2007 article in Financial Week, a survey last year by consulting firm Prince & Associates, which polled almost 300 hedge fund managers with a median net worth of more than $60 million, found the average manger spent nearly $4 million on fine art in 2005. So are these funds an example on conflict of interest? For another take on the investment in fine art and fine art hedge funds, take a look at this article in Portfolio Magazine. Like every investment opportunity, there are two sides to the story.