Art funds: an inside view from Artemundi
The art fund industry is developing with trepidation, Paloma Evoli, who analyses the global art market for the Artemundi Global Fund, is convinced of their efficiency in portfolio diversification, asset protection and financial long-term solvency.
“The financial academia but mostly experience has provided us with the tools needed to prove the soundness of such a statement,” she says. “In spite of the market inefficiencies that characterize the art world, art investment funds are able to adapt and use those inefficiencies in their favor.
“Most of the art funds that exist today would be characterized as boutique investments vehicles because of their size; however, the number of funds in the industry continues to increase each year in numbers and size.”
Evoli says that a very important issue influencing the art market during the last decade has been transparency: information that was previously very hard or even impossible to grasp for the average market player has become available online through public databases. The information available has also triggered academic research both from the financial and art worlds.
“As a consequence of market transparency and specialization, the financial sector has become interested in alternative investment assets like art because they are not correlated with traditional financial instruments,” she says.
She believes that many early players in the art fund world failed because they launched their art funds too soon without considering the overall conditions of the market or because they did not have a solid understanding of the asset, or the information necessary to project their M&A costs with accuracy.
“Also, it is always very difficult to raise money without the track-record,” she says.
All that is changing. Art Fund history is considerably short compared to other financial instruments, but Evoli points out that new financial vehicles are constantly created because there is a demand for them.
“Additionally, most successful funds are beginning to have an acceptable track record to prove the business model,” she says.
Evoli believes that art funds operate in a unique space. For the investment industry, art is difficult to quantify. For the art industry, art funds are quantifying the value of art and assessing its investment risks with transparency and objectivity defying the opaque traditional art market status-quo.
“The old saying of, ‘buy what you like and never mind the price,’ becomes an obvious trap for the art investor. Some will say that art funds don’t care about the intellectual component of the artworks and are only worried about the return that they achieve. Not true.
“Not understanding the emotional value of art, would be like not understanding the underlying investment asset at all. Art instincts trumps financial experience. Some complain that funds will try to corner markets or resale without concern for an artists´ career. Or that the artworks will be stored in a bank or safe for a long time without anyone enjoying them.”
Evoli says these statements are also untrue, firstly because art funds generally favour dead artists many years of solid track records over contemporary artist. Additionally, it critical for an Art Fund to add value to the artworks; this is mostly done by constant care and improvement of the condition, if necessary, of the artworks, and exhibition in major museums or institutions.
“Finally it is also critical to engage in academic research and curatorial expertise of all inventories,” she says.
As well as seeing art funds as having a positive impact on the art world, Evoli believes that investing in such a fund can be a uniquely enriching and stimulating prospect.
Strategic investors enjoy benefits such as most favoured status, access to premier events, recognition and acknowledgment, access to buying opportunities, receipt of comprehensive art advisory services, rights to display funds’ artworks, and advisory committee representation.
“Each of the strategic investors will have the right to serve or designate someone to serve as their representative on the advisory committee and have special withdrawal rights,” she says.
Asked whether an investor should consider setting up their own art fund, Evoli gives this advice:
“If you are serious about your money, we would not recommend it. We did this before for more than a decade before 2007, but the lack of an institutionalized investment vehicle brings inherent risks of poor management decisions, questionable arm-length transactions derived of weak controlling mechanisms and lack of the manager´s fiduciary duty. “Moreover entry costs are high and it requires a team of well-trained art and financial expertise to build and manage an optimal art portfolio suitable for investment.”
When choosing an art fund, she recommends that investors look for the fund’s track record, the management’s history and experience, the investment requirements, the fees and commissions, the investment horizon, the exit strategy and the fund’s investment protocols among other things.
“Find out about the manager´s ability to control M&A costs and ability to keep transactional costs at a minimum,” she adds. “Make sure the manager understands well the underlying asset and the intrinsic risks of investing in art, among others authenticity risk, title risk, investment risk, casualty risk and currency fluctuations risk.”