Why Invest in Art


 

The fine art asset class is characterized by a global market of $64 billion in annual turnover and 36.5 million annual transactions[1]. Its 15-year CAGR is 6%, compared to 4% for the S&P 500. Top performing artists at auction have even outperformed the stock market—for instance, Claude Monet, rated third best performing artist in 2015 by artprice.com, showed a price index increase of 133% over the past 10 years.

The global art market has for decades been geographically dominated by the U.S., UK, and China, with the U.S. taking 43% of the market in 2015. The U.S. and UK have become the two primary international trading hubs, with its high concentration of artworks, collective knowledge, and logistical services to support the market. The greatest concentration of art sales occurs in New York City.

Target Sectors 

Arthena invests in works in the modern, post war, and emerging artist sectors, which represent over 60% of the global art market. This sector has recently grown at a rate of 19% year-on-year. 

The post war and contemporary artwork sector has become distinguished as the key center for record, multi-million dollar prices at auction. Works priced at over $1 million accounted for 58% of the value but less than 1% of the number of lots sold during the year. As in most other sectors, the bulk of transactions are in reality at much lower levels. In 2015, 90% of works that were sold at auction were priced below $50,000, with 54% less than $5,000. These transactions, however, only made up 12% of the sector’s value, which remains dominated by the top end of the market.

The U.S. remains the key market worldwide for the sales of post war and contemporary art, with a global share of 47%. In the market above $1 million, the U.S. has a much larger share, at 61%. It accounts for 77% of the segment over $10 million, with 54 of the 74 works sold in New York City.

Sales of post war and contemporary art in the U.S. increased by approximately 270% in the period between 2005 and 2015, and by over 340% since 2009. The Mei Moses Post-War & Contemporary Art Index was up 4.1% from 20154 to 2015.

What are the Fund's Main Investment Strategies?

Arthena seeks to achieve the Fund’s objective by acquiring and selling assets for a profit with a mid-term horizon. Through its quantified targeting models and alternative investment focus, Arthena seeks to generate strong alpha with low correlation to traditional financial markets, providing a distinct option for portfolio diversification and financial market hedging. The art market is liquid and developed, but Arthena is the first quant-driven investor in this space, combining proprietary analytics with traditional appraisal.

Overview. Arthena builds the Fund as a collection of individual works of art, targeting acquisitions that we predict to grow 20% or more year over year at an acceptable level of risk. Much like a quant-focused hedge fund or mutual fund, we use cutting-edge analytics on hundreds of thousands of datapoints (in this case sales from major auction houses). Combining the results of our quantitative model with final checks by our seasoned experts, we identify and acquire assets with attractive pricepoints, strong growth potential and low volatility, to deliver a strong return for investors.

Portfolio Turnover

Arthena will actively manage assets thorugh the lifetime of the fund. The same asset may be bought and sold within the same year, or may be held for multiple years and then divested. The underlying market conditions, liquidity, purchaser trends, and artwork value drivers will be determine the precise turnover rate, anticipated to be less than 100%.

 

Investment Process

As the Fund closes, Arthena analysts review listings at upcoming auctions, works for sale in galleries or on the open market to identify works within our “opportunity hotspots”.

The analysts examine auction lots ahead of time to complement the quantitative analyses with firsthand observations and insights. In some cases Artworks may be eliminated from candidacy based on this, or on further market research, qualitative observations, and knowledge of the art world.

The next step is to input a work’s parameters into the Fund’s quantitative model, to generate the “Arthena quant estimate” of its current value, as well as expected price growth and volatility. Analysts may further adjust the price estimate based on additional factors such as an artwork’s condition report, number of times it has been offered for sale, or source of sale.

Works with price growth projections below 20% per year or volatility exceeding reasonable levels are then eliminated from consideration.

Buy recommendations are generated for the remaining works according to the optimal portfolio. This set of bids is created and prioritized, along with maximum bidding prices for each work. For pieces of work with expected price growth at or close to 20%, the maximum bid price will equal the “Arthena quant estimate”. In cases where a higher growth rate is anticipated for a work, the maximum price bid may exceed the Arthena estimate – up until the limit whereby annualized growth between the bid price and the forecasted future value of the work reaches our minimum threshold of 20%. 

The optimal portfolio can be re-balanced in near real time as individual artworks are bought and sold. If Arthena purchases an artwork for less than its predetermined maximum bidding price, additional moneys become available to the Fund and the portfolio optimization is re-run with these new numbers for the remaining available works. Similarly, if a work’s price at auction exceeded the maximum bid price hence the work was not purchased, or if an open-market work was sold, the portfolio is again rebalanced and new targets are set. 

Works are purchased with the expectation of being held for up to 5 years. Changing market conditions may affect the precise timing for divesting a held artwork.

Applying our analysis to last year’s art market indicates that Arthena could have deployed up to $500M in capital, given our investment parameters (price, asset value) and our requirements for expected asset growth, volatility and liquidity.

 

 

 

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[1] 2013 estimate by The European Fine Arts Foundation (TEFAF)