8.4 Art funds and other investment vehicles

Art funds offer a unique way to invest in the art market without directly owning artwork. They pool money from multiple investors to buy and sell art, aiming for financial returns and portfolio diversification. These funds provide professional management and access to high-value pieces.

Compared to direct ownership, art funds offer more diversification but less control. They typically have higher minimums and fees, and less liquidity. Performance can be hard to evaluate due to lack of transparency. Art funds are best suited for accredited investors seeking long-term, alternative investments.

Art Investment Funds

Structure and Features

Top images from around the web for Structure and Features

• 

  File:Venture Capital Fund Diagram.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Fund Structure.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Chart of a limited partnership.jpg - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Venture Capital Fund Diagram.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Fund Structure.png - Wikimedia Commons View original

  Is this image relevant?

1 of 3

Top images from around the web for Structure and Features

• 

  File:Venture Capital Fund Diagram.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Fund Structure.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Chart of a limited partnership.jpg - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Venture Capital Fund Diagram.png - Wikimedia Commons View original

  Is this image relevant?

• 

  File:Fund Structure.png - Wikimedia Commons View original

  Is this image relevant?

1 of 3

• Art investment funds are privately offered, pooled investment vehicles that allow investors to collectively own a diversified portfolio of art assets
• Fund structures can vary but often involve a limited partnership with the fund manager as the general partner and investors as limited partners
• Typical fund features include:
  • Defined investment strategy
  • Minimum investment requirements
  • Lock-up periods restricting withdrawals
  • Periodic redemption windows
• Funds charge management and performance fees, with "2 and 20" being a common structure
  • 2% annual management fee
  • 20% of profits

Objectives and Strategies

• The primary objectives of art funds are:
  • Generate investment returns
  • Provide portfolio diversification benefits through exposure to the art market
• Some funds focus on specific art market sectors (contemporary art), while others have a broader acquisition strategy across multiple collecting categories
• Funds can be structured for:
  • Financial gain
  • Combined investment and philanthropic purpose, such as loaning works to museums

Funds vs Direct Ownership

Advantages of Art Funds

• Art funds offer greater diversification and risk mitigation than concentrating capital in a small number of individually owned works
• Funds provide access to:
  • Professional management
  • Ability to invest in higher-value works that may be unaffordable for individual investors
• Investing through a fund structure provides the ability to gain financial exposure to the art market without the responsibilities of maintaining, insuring and storing a physical art collection

Disadvantages of Art Funds

• Art funds typically have:
  • Higher investment minimums
  • Higher fees
  • Less liquidity than direct art purchases and sales
• Investing through a fund offers limited control and discretion over acquisition and disposition decisions compared to direct ownership
• Investing in art funds requires relying on the skill and expertise of fund managers to generate returns, while collectors can make their own judgements owning art directly

Performance of Art Funds

Notable Funds and Managers

• The Fine Art Fund Group, founded by Philip Hoffman in 2001, is considered a pioneer of the art fund model and has launched several funds focused on different market sectors
• The Artist Pension Trust (APT) was established in 2004 and allowed contemporary artists to invest works in the fund, which would be sold to benefit the artists and other investors
• Liquid Rarity Exchange is an art investment fund platform that has sponsored funds focused on:
  • Old master paintings
  • Chinese art and antiquities
• Artemundi Global Fund was co-founded by Javier Lumbreras and has sponsored funds emphasizing a research-driven, cross-category acquisition strategy

Evaluating Fund Performance

• Evaluation of art fund performance requires examining:
  • Realized returns from the sale of fund assets
  • Valuation of unsold works
  • Comparisons to art market benchmarks
• Lack of consistent public disclosure and the infrequency of realizations make assessing fund performance challenging compared to more liquid and transparent investment vehicles
• The track record and reputation of individual fund managers, their strategies, and their access to deal flow are important factors in evaluating funds

Suitability of Art Funds

Appropriate Investors

• Art funds are most appropriate for investors who meet the SEC definition of an accredited investor based on their income and net worth
• Funds are suitable for investors seeking portfolio diversification, but the low correlation of art to other asset classes has not been conclusively established
• Investment minimums for art funds typically start at $250,000 to$1 million, making them accessible only to high-net-worth individuals and institutions

Investor Goals and Profiles

• For investors primarily seeking financial returns, art funds should be evaluated in the context of their overall asset allocation and investment goals
• Collectors may find art funds appealing for:
  • Gaining broad market exposure beyond their physical art holdings
  • Complementing direct purchases of individual works
• The long-term lock-up periods of art funds make them unsuitable for investors who prioritize liquidity and the ability to access their capital on shorter time horizons
• Funds that acquire works for a combined collecting and philanthropic purpose may appeal to investors seeking to create a tangible cultural legacy beyond financial returns