Art Investment Funds: The Basics

By Jessica M. Curley

Fine art is known to have little intrinsic value beyond its cultural significance and aesthetically pleasing nature, yet it seems to be an increasingly attractive alternative to traditional investment assets. The CEO of Blackrock, Larry Fink, recently remarked that one of the “two greatest stores of wealth internationally today is contemporary art,...” adding that, all jokes aside, it is a “serious asset class.” Although many art world enthusiasts advise that people only purchase art if they truly admire it, recent record-high sales and huge upside potential are attracting the attention of those more focused on profit-making. One mechanism utilized by some of these profit-seekers to gain exposure can be found in fund-structured vehicles sometimes referred to as “passion funds.” These art investment funds, or “passion funds,” provide the opportunity for investors to tap into the potential of artworks to diversify portfolios and potentially obtain significant returns. While some money managers have also taken interest in other niche asset classes including fine wine, vintage vehicles, stringed instruments, rare gems, and even comic books, this article focuses primarily on fine art.

Background & Market

Individuals and private clubs have been collecting fine art with varying degrees of investment intent for hundreds of years. However, the first institutional investor to specifically allocate capital for the purpose of investing in art is widely considered to be the British Rail Pension Fund, having acquired about 2,500 objects during the 1970s for a total cost of about $70 million USD, close to 3% of the total fund. Institutional investing in artworks has evolved since the 1970s, resulting in the emergence of more and more funds exclusively dedicated to the asset class. The collapse of the dot-com bubble in 2001 also fueled the art fund trend as investors looked outside of the market for alternative opportunities. This trend of looking towards alternative assets was seen again following the financial crisis of 2008, as investors increasingly focused on tangible assets and alternative types of investment opportunities. Shortly thereafter, 2010 saw record sales of artworks at both Christie’s and Sotheby’s, which further demonstrated the potential offered by fine art. More recently, in 2014 the global art market reached the highest level ever recorded, a total of over €51 billion.