Wealthy investors looking to diversify beyond stocks and bonds are now turning to an unusual money-making vehicle — the art investment fund.
The name says it all: These funds invest in fine art and seek returns by acquiring and selling high-end pieces for profit.
Growth in art investing has helped smash records for international art sales, which hit $66 billion last year. And the idea has been catching on with the very rich — a group that already uses collectors’ items and luxury goods as investments — in the years following the global financial crisis.
“People are looking at new areas to invest in, and at the moment art is one of those — it’s making people money,” said Jon Reade, co-founder of Hong Kong-based art brokerage Art Futures Group.
As with stocks, fund managers might buy pieces they believe are currently undervalued, perhaps from emerging artists. Funds can also buy into “blue-chip” artists — similar to blue-chip stocks, these are top artists whose coveted works may offer more reliable returns.
Some art investment funds focus on investing in art from a certain region, a particular style period, or a specific medium, such as photography.
Another strategy is to buy in bulk, from a gallery or artist nearing bankruptcy, or to arrange for pieces to be exhibited — a move that can help increase value.
Fund managers try to predict when a certain work will peak in value — the golden moment to sell for a profit. To accomplish this, managers track a variety of indicators from auction houses, curators and galleries that can illuminate otherwise murky trends.
Art funds are relatively new, and hold total assets of roughly $2 billion worldwide, according to the Art Fund Association, an industry group. That’s still tiny compared to the $2.6 trillion hedge fund industry.
But related businesses are already springing up to support investing in art, such as freeports — highly secure, tax-free places to stash fine art and other luxury items.
Future demand for art funds is expected to come from Asia, and especially China. Chinese demand boosted the global art fund market by 69% in 2012 alone, according to a Deloitte report.
Art investing is attractive to the Chinese due to limited investment options in the country. Plus, it promises big gains — China’s contemporary art market has gained roughly 15% each year in the last decade, while stocks have been largely flat, said New York University professor Jianping Mei, the developer of a fine art index.
CNNMoney (Hong Kong) First published April 17, 2014: 10:07 PM ET on money.cnn.com
By Keisha Lamothe@CNNMoneyJune 1, 2012: 8:13 AM ET
NEW YORK (CNNMoney) — Artwork by Andy Warhol, military medals, helicopters, and a Babe Ruth baseball bat aren’t the typical pawnshop fare. But all of these valuables have been used to secure loans through a personal asset company called Borro.
At a time when small business bank loans can be hard to get, more entrepreneurs are looking for alternative ways to finance their businesses. Borro is trying to tap into that niche, offering short-term loans between $1,000 and $1 million to small businesses and other clients who provide collateral such as fine art, watches, jewelry and even private jets and yachts.
Paul Aitken, founder and CEO of Borro, came up with the idea for the firm after Lehman Brothers collapsed in 2008.
“I felt there was an opportunity to provide a business that bridges the gap between the very high end types of lending that private banks do and the very high end of retail pawnbroking,” he said.
Borro doesn’t have a retail presence, though, and it offers much bigger loans than a traditional pawnbroker, so “we don’t actually call ourselves a pawn shop,” said Aitken.
Indeed, loans average about $17,000 at Borro vs. $150 at a traditional pawnshop, according to data from the company and the National Pawnbrokers Association. Depending on the item, a customer can borrow between 50% and 70% of its resale value at an interest rate ranging from 2.49% to 3.99% per month.
Originally launched in the UK, Borro made its way stateside in January. Clients include small business owners who need cash to invest in new technology or finance a growing business, as well as private individuals garnered through referrals from private banks and financial advisors.
Managed by a professional manager or advisory firm, they seek to deliver returns through the appreciation and ultimate sale of their underlying assets, which includes paintings, sculpture, photography, video or print.
Some art investment funds focus on investing in art from a certain region, a particular style period as well as a specific medium.
Fund managers must be diligent at trend and market analysis—tracking auction houses, curators and galleries—since their role is to predict when a certain work will peak in value in order to sell for a profit.
In its 2014 Art & Finance report, Deloitte Luxembourg and market research firm ArtTactic found that 76 percent of art buyers and collectors were acquiring art and collectibles for investment purposes, up dramatically from 53 percent in 2012.
At the same time, some 88 percent of family offices and 64 percent of the private banks surveyed said estate planning around art and collectibles is a strategic focus in the coming 12 months. Roughly half of the family offices surveyed also indicated that one of the most important motivations for including art and collectibles in their service offering was the potential role it could play in a balanced portfolio and asset diversification strategy.
Indeed, multimillionaires have a disproportionately high allocation to cash, according to a 2014 survey by U.S. Trust, which found 60 percent of those with at least $3 million in investable assets held between 10 percent and 25 percent of their money in cash.
While all art funds utilize a traditional “buy and hold” strategy, individual funds differ in their size, duration, investment focus, investment strategies and portfolio restrictions, according to the Art Fund Association. Most charge 1 percent to 3 percent of assets in annual management fees and take a cut of profits at the end of the fund’s life, some as much as 20 percent.
By Shelly K. Schwartz, special to CNBC.com Photo Credit: John Macdougall | AFP | Getty Images