Art as an Investment: Evidence of Corrections?

Disclaimer: I am NOT a financial adviser. Most of these thoughts represent only my opinions. Don't invest based on them.

Not so long ago the "art as investment" crowd was very excited. Things were looking up. Art funds were blossoming. A fund of art funds was even lauched by the Dutch bank ABN-AMRO. In fact, things were so rosy, Christies hosted a one-day symposium titled "Art: An Alternative Asset Class" on April 7, 2005, where reports suggest the attitude approached giddy (well, as "giddy" as financial types ever get). See artnet.com's report here.

At that symposium, ABN-AMRO's Global Head of Private Banks Ariel Salama predicted that as much as $30 billion of private equity capital would move into art funds as an alternative investment over the next ten years. That may still prove to be true, but it won't happen through ABN's fund. As Forbes (and others) have reported, ABN has pulled out of the art funds market. In fact, of the eight or so best known art funds, only one is reportedly actively buying art, the London-based Fine Art Fund:

"We are spending about $2 million a month, having started in July 2004," says Chief Executive Phillip Hoffman. "We have bought many million-dollar paintings and have sold some, most recently two works, which we bought privately and resold within 25 weeks, which gave us an 80% mark-up."

But they are the exception it seems. Other art funds, including the China Fund, the Fernwood Sector Allocation Fund, the Fernwood Opportunity Fund, the Artist Pension Trust's Art Dealers Fund, Graham Arader's fund, the Irvine Collection Fund, and the Art Collectors Fund, are all reportedly struggling to get the ball rolling, purchasing-wise at least. Of course, as some of these fall outside the jurisdiction of the Securities Exchange Commission, my guess is what anyone (including reporters) truly knows about them is not really up-to-the-minute.

But what does this really mean for the art market? Is it an indication that long-expected corrections are coming?

Not necessarily. It can take years for investment firms/groups to raise their target capital, so we may simply be witnessing the spurts of that naturally uneven process. On the other hand, institutions like ABN know this, so their decision to pull their fund of art funds suggests they don't think the market is ready for such a product. But that needn't spell doom: as the Forbes article suggests, the smaller "niche" funds are perhaps a better solution for the highly unregulated art market:

These smaller and more flexible funds are often set up by dealers and seek investors from a small group of friends and clients, an example is Daniella Luxembourg's Swiss-based ArtVest. By remaining informal, such funds avoid the straitjacket of financial regulations in the U.S. and the U.K.

One thing is sure though, if any of this scares off the more cynical figures within the art-as-investment crowd, I won't cry about it. As art adviser Thea Westreich noted, there are growing numbers of investors calling themselves collectors with the most vulgar of intentions to flip artwork solely for profit:

"Collectors/art investors are putting together small syndicates, and they increase in number daily. You see them at fairs; they're wearing baseball caps and sneakers; they act covertly, but dealers are starting to recognize them," she says, adding, "All these new financial ventures will ultimately skew the marketplace."

Those folks I'll encourage to invest in something else.