New Fine Art Fund in the Making

Investing -- not collecting, but investing -- in art is an idea that always seems promising. Christie's recently reported record earnings of $5.3 billion (£3.3 billion), the highest in the auction house's 245-year history and up 53% from 2009. The New York-based Beautiful Asset Advisors, which tracks the annual profit margins of artworks sold at auction against the Standard & Poor's Index, issued an end of 2010 report that found art producing 16.6% returns in 2010 compared to the S&P's 15%. The only problem is that over the past decade a number of investment companies in the United States and Europe have announced plans to develop art hedge funds, but few have actually succeeded in attracting investors and creating the funds.
Still, another attempt may be on the way. On January 26, the Dubai-based Emirates NBD, the largest bank in terms of assets in the United Arab Emirates, announced a partnership with the Fine Art Fund Group in London, a private art investment company formed in 2001, to provide consulting services to the bank's private banking clients seeking to buy art as an investment.
The Fine Art Fund Group will offer three options to Emirates NBD clients. The first is consulting, "educating them about the art market and providing them access to buyers and sellers," according to Rhea Papanicolaou-Frangista, the fund's associate director. The second is setting up individual, private managed accounts for bank clients "who don't want to mix their money with other people's money in a general fund," said Philip Hoffman, chief executive officer of the fund. Third, private banking clients also may invest in the fund's most recently established funds, the Middle Eastern Fine Art Fund and the Fine Art Fund III, which invests in artworks by "blue-chip artists in five categories"-old masters, Impressionist, modern, contemporary (postwar), and "very contemporary" (post-1985). Clients would invest a minimum of $250,000 to participate in either the group or individual funds.

Hoffman stated that the fund has been very active in the art market, having sold "fifty million dollars in art within the last three years, with an average twenty-six-percent return over every asset sold." The fund began offering individual managed art accounts in mid-2010 to its regular investors; to date, ten people have signed up for them. Overall, the fund has approximately 100 investors with assets of $100 million. Hoffman speculated that the largest number of Emirates NBD private banking clients likely would want to start up an individual account.

Gary Dugan, acting general manager and chief investment officer in charge of private banking at Emirates NBD, claimed in a statement that "art as a tangible asset continues to attract international investor attention in the post-recession world, and the market for art has remained strong in 2010." He added that "Middle East investors are also expressing greater interest in art," and stated that of the artworks sold at auction in 2010 for $100,000 or more, "approximately twenty-five percent went to buyers from Russia, Asia, and the Middle East."
While the auction sales prices of many topflight artworks in various categories have been strong, the universe of art hedge funds is small. "Setting up one of these funds is harder than it would seem," said Michael Moses, one of the two directors of Beautiful Asset Advisors, which produces its art price index for subscribers. "You are asking people to give you money up front, hoping that you have the capability to pick the right artworks. It's very difficult to sell that idea."

All art hedge funds, he claimed, are based on finding "market inefficiencies. You want to find things that are undervalued and then sell them at market price." He claimed, however, that the art market is not particularly inefficient, that "most artworks are correctly valued," and that "you may not be able to support a large number of funds of this kind." He also noted that there is "very little transparency in this field, and it is difficult to develop a track record."

Among the other art hedge funds in existence is The Collectors Fund, based in Kansas City, Missouri. It was started in 2007 and focuses on American art (its investors are individuals and corporations that, for an additional charge of $1500, may exhibit the artworks in their homes or offices on a rotating basis). It was founded by Alexander Kemper, former chairman and chief executive officer of Perfect Commerce and UMB Financial Corporation and the son of Bebe and Crosby Kemper, who established the Kemper Museum of Contemporary Art in Kansas City. Although the private equity fund is not associated with the museum, Kemper noted that the strong reputation of the museum "probably convinced potential investors that we know what we're doing in art." He noted that sales of artworks from the initial art fund have brought an average rate of return of 28%.

Another art fund is run by Castlestone Management in London, which has 19 different hedge funds, the most recent of which is focused on art, the Collection of Modern Art Fund, which was started in 2009. "It is difficult to raise money from investors in this area," said Constanze Kubern, senior art advisor at Castlestone, "because you need a track record and expertise in this area. Fortunately, we have eighteen other funds, so we have a potential client base that has trust in our abilities to manage assets, but you still need to do a lot of educating of clients to show that it can work."

The Collection of Modern Art Fund consists of 30 artworks, representing "blue-chip postwar art, artists like Warhol and Picasso." It was valued at $15 million in 2010, up 28% since 2009, Kubern said. Those prices are not based on sales, however, since artworks will be held for approximately eight years before being sold, but have been determined by "external appraisers." She noted that Castlestone also has been in talks with a number of banks about providing a similar advising service to their private banking clients, but those banks "are waiting to see how viable we are over a two-year period."