WHAT EXACTLY IS AN ART FUND?
Posted on in Editorial by Sonja
The environment for art investment has seen the creation of art funds before. The most commonly cited examples of art fund models include La Peau de l’Ours (Bearskin) art club (1904), the British Rail Pension Fund (1974) and more recently the funds launched by London-based The Fine Art Fund Group (2003).
Art funds are generally privately offered investment funds dedicated to the generation of returns through the acquisition and disposition of works of art. They are managed by a professional art investment management or advisory firm who receives a management fee and a portion of any returns delivered by the fund.
The underlying characteristics of art investment funds are diverse and vary from fund to fund. While all art funds utilize some form and degree of a traditional “buy and hold” strategy, art funds differ in their aggregate size, duration, investment focus, investment strategies, and portfolio restrictions. The unifying factor of all art investment vehicles is their focus on the art market, which is characterized by a lack of regulatory authority, deficient price discovery mechanisms, the non-transparency of the market and the subjective value and illiquid nature of fine art.
The last few years has seen a significant increase in the number of art investment funds that have launched or are in the process of being launched. Art funds can produce returns that have little or no correlation to those of more traditional stock and bond investments thereby helping to diversify the overall risk of an investment portfolio, and the lack of regulation of the art market provides unique opportunities for arbitrage that can be exploited for the benefit of art fund investors. Moreover, as most art funds are structured so as to weight art fund managers’ compensation towards performance incentives that involve a significant sharing of the gains earned by the art fund between the fund’s managers and its investors, talented art market professionals are electing in growing numbers to form or work for art funds so as to share in compensatory arrangements that have the potential to greatly exceed those of traditional positions within the art world.
Deloitte and ArtTactic’s 2016 Art and Finance Report estimated that there are only 54 formal art funds in existence and that 34 of these, nearly 70%, are based in China. In the same report, Deloitte and ArtTactic placed a conservative $1.20 billion estimate on the current value of the global art investment fund market. Although 2016 saw a decreased market valuation compared to an estimated $2.13 billion in 2012, this contraction is attributed to the decline in the number of Chinese art funds and trusts triggered by tightened government regulations on trusts introduced in 2014. In contrast to the relative volatility of Chinese art investment funds, the European and US art fund landscape has exhibited stability in terms of AUM and the total number of active art funds. Total AUM of non-Chinese (US and Europe-based) art funds is estimated at just $417 million, with just one major art fund, The Fine Art Fund Group, constituting close to 60% of the combined US and European total. The US currently lacks a significant market share of the art fund industry, as the non-Chinese art fund environment is heavily skewed toward European-based art funds, which comprise around 80% of the combined European and US AUM. Total AUM is rising, however, as investors increasingly seek entry into the world of art investment. For individual investors seeking to add art as a part of their investment portfolios, art funds afford such investors with the opportunity to pool their funds with other investors, thereby diversifying their art holdings, and to benefit from the expertise of art fund managers who understand how to operate in what is generally known as a non-transparent, illiquid and unregulated industry.
Part of what differentiates Arthena from other art investment vehicles is its unique online platform. Arthena’s online platform solves this problem by directly connecting investors to their collections, offering them instant access to view their artworks remotely at any time. Additionally, Arthena’s web platform provides unparalleled transparency by offering 24/7 access to current art market data and allowing investors to track their investments against other investment indices. Compared to traditional art funds whose maturity periods typically run for 10 years, Arthena’s funds feature greater liquidity due to their 5-year maturity period. Furthermore, the artworks acquired by Arthena’s funds are not necessarily sold simultaneously. This structure not only provides added liquidity to our investors, but also grants Arthena a larger window of time in which to strategically sell acquired works to generate the highest possible returns on each.