NEW YORK. Last month I was interviewed for a piece in The New York Times on the rise of art funds and art securitization generally. The piece is now available here. As I explained to the author, the reasons underlying the growth in art funds are several. Firstly, 2010 saw record auction prices being set for painting, sculpture, rare books and Chinese art and the article correctly references each of these. Secondly, as investments in traditional assets (stocks, bonds) continued to perform erratically, the notion of art as an alternative investment class was firmly consolidated, albeit partly by default, and art is now widely held as an acceptable and important way of diversifying investment portfolios. Thirdly, since the on-set of the financial crisis, investors have shown greater interest in tangible assets including art.
The rise of art funds is not without problems and related to the question of how the pooled art assets will be valued is the issue of conflicts of interest. In Russia for example, investors can not only pay cash for units in the two art funds established by the asset management firm Leader -- they can also contribute art instead, with the fund managers themselves determining how many units an investor gets for a particular art fun. This means that public investors, likely to be investing cash rather than expensive works of art, may be overpaying for the fractions of the art works they will own. The risk of "close friends" of the managers acquiring an inflated number of units is very real given the overlap between wealthy art collectors and financial professionals (and even more so in Russia). While disclosure is vital and would allow investors to assess the risks associated with any conflicts of interest, fund managers should be outsourcing the valuation of the assets to an objective, independent source but in such a knowledge-intensive market, the options are slim. Another issue is how freely transferable the units will be. From what I've read to date on the subject, investments through art funds are medium to long-term which makes sense given how illiquid art assets but it is unclear how liquid the units themselves will be.
Setting aside the legal and financial issues, it's very interesting to see the quote from the President of the Art Dealers Association of America stating that she "would never allow a young artist to sell artwork to a pooled fund." Resistance from certain subcultures within the art world is to be expected but that's a pretty strong statement coming from someone who is actively involved in the art market (Lucy Mitchell-Innes is the co-founder of the Chelsea-based gallery Mitchell-Innes & Nash). Stay tuned for much more on this fascinating field.