Selecting an Art Fund

With all of the attention the art market has received over the past few years, investing in art as an asset class has become of interest to both collectors and investors.  Kelly Crow of the WSJ recently hosted a panel at the Armory art fair on investing in art through an art fund.

The panel discussion came up with a short list of questions to be answered before investing in an art fund.  The end result was if you are going to invest in an art fund, know how the system works. The questions are very good, and many are applicable to investing in the art market in general and not just art funds.

The panel reported on Art Funds

The panel ended up compiling a sort of list of how to vet an art fund during the due diligence process as a potential investor. The following is a list of questions that the panel came up with:

— Who is the manager? What is his (or her) background? How much of his or her own capital is invested in the fund? Is he or she advising on art purchases outside of the fund? If so, make sure the best artworks are going into the funds, not into the hands of his or her private clients.

— What kind of art is the fund buying — is it reasonably priced enough that a return is probable? If it is in a particular section of the market (Chinese porcelain, Indian painters, etc.), is there reason to believe that the market is experiencing secular growth? Are the works good representatives of the artist's work? Is the fund's portfolio diversified?

— What's the fund's previous record? What's the track record like in bad years? Lastly, if the fund is reporting returns to you, make sure you know how much art is still in the portfolio waiting to be sold (if only two of 20 works have been sold, the rate of return doesn't mean much).

But really, the highlight of the discussion came at the end, from an audience member who reminded everyone that the larger art world still doesn't understand what art funds do, nor the huge risk associated with "investing" in art, and unintentionally showed how kooky the art market has become. Why would you buy into an art fund, she asked, when you could just buy at auction and flip it six months later for twice the price? (This had something to do with a small Gerhard Richter a friend had sold). The answer is, quite plainly: If you think it's that easy, you shouldn't be risking your money doing either thing.

Overall, what was the takeaway of the panel? If you are going to gamble on art funds, at least do your homework and make sure you know how to play the game (and how to count the cards).

Source:  Bloudin ArtInfo