The Center for Art Law has an interesting article on art funds. It is long, but worth reading, I have posted one of the sections, Pros and Cons in the block quote below. Follow the source link below to read the full article. The article topics inlcude a brief introduction, backgrounds and markets, the players, structure, regulations pros and cons, and the future of art funds. Well worth taking the time to read and familiarize yourself with funds and how they work.
The Center for Art Law reports
Source: The Center for Art LawPros & Cons
Art funds offer many unique advantages to investors. The value of fine art is generally uncorrelated with traditional financial markets, providing a means of diversifying portfolios, and hedging against market downturn and inflation. Art typically holds its value, especially on the higher end, and has consistent performance returns, which are very attractive characteristics to investors. Although the art market is subject to little oversight, actual art funds are subject to some financial industry regulation and must comply with initial and periodic disclosure requirements, and antifraud provisions, which provide some level of investor protection. Art fund managers also have a fiduciary duty with regard to their investors, which is virtually non-existent in gallery-investor or auction house-investor relationships. Additionally, fine art has an inherent appeal as a luxury good, and depending on the fund, may be loaned out to investors for personal use.
One potential drawback of art fund investing is that traditional financial modeling does not generally work due to the unique nature of art works and trends in the art market. For investors who are accustomed to relying at least partially on traditional models, this may cause some discomfort. Another concern is that art funds require professionals who can strategically advise on the purchase and sale of art works; however, this is a difficult skill to qualify as past performance is often hard to measure. Limited liquidity is a major issue facing art fund managers and investors; art must be sold according to market trends in order to maximize returns, which may not coincide neatly with the close of a fund. Furthermore, as previously mentioned, unlike the financial markets, the art market is highly unregulated leading to less investor confidence in fair dealings, and more potential for price fixing and manipulation. The issue of valuation presents another problem for art funds as the value of acquired works remain that of the purchase price, not accounting for any shifts, until there is a liquidity event, making it hard to value a fund at certain benchmarks. Provenance issues, including forgery, looting events, and misattribution, are also pervasive in the art world and may arise if proper research is not carried out prior to purchase. To this end, title insurance may be purchased to protect a fund against a murky provenance.
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