Participating in an art fund gives access to co-investment and adds diversification to a portfolio. But due to the high volatility of art’s value, it is necessary to invest over a longer period to adequately hedge.
Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. • It is also a risk management technique that mixes a wide variety of investments (assets) within a portfolio. • The concept of diversification of risk has a long history as evidenced by the adage “don’t put all of your eggs in one basket.“ it is all portfolio management on its most fundamental level.
Understand international factors affecting art such as exchange rate movements, cultural factors affecting art and market preferences.
• Rising demand for artworks and increasing prices are driven by increasing global wealth.
• Artwork in the lower price categories react negatively to economic slowdown – demand drops while supplies increase, thus forcing selling.
• Artworks in the top price categories hold up well during weak economic environments.
• Art prices tend to have a positive correlation with inflation.
• When the stock market is in a downturn the art market booms – investor appetite shifts to tangible investments.
Measuring Art Market Performance
Unlike other markets, the transparent sales of the art market are only held at auctions, on set dates, and in specific seasons. • Art indices only work in the secondary art market and not the primary market – they are based only on auction results, not on private sales. • Investing in art disregards the traditional benchmarks of financial analysis as art does not generate an income stream, such as dividends. • Assessing a value by calculating future cash returns based on estimating future inflation and interest rates cannot be used to value a work of art. It is a bet on the price appreciation of something whose value defies financial logic. • Art incurs a negative income in the form of storage, insurance, transportation and other associated costs; and not all art works earn a positive rate of return. • Art is very volatile; it has performed in some decades and not at all in others.