Fine art sales have reached record levels, with the global art market achieving annual sales of over $60 billion. However, the art market is extremely risky and the most lucrative investment opportunities are typically at the high end of the market. In recent years, financial industry professionals with an interest in the art world have increasingly formed art investment funds, intended to enable smaller investors to take advantage of the opportunity to invest in the art world and diversify their portfolios. Some art funds also allow art investors to borrow against certain assets. About 45 art investment funds currently exist, taking many different forms.
The art market is notoriously opaque and insular. On the primary market, only insiders have access to desirable works, and even basic information like price is typically confidential. And even on the secondary market, access is limited, and information remains scarce and unreliable. This cartelization and inefficiency often provides lucrative arbitrage opportunities to insiders with access and reliable information, even as they make it difficult for outsiders to profitably invest in the secondary market.
Financial technology (“fintech”) promises to transform the art market by providing access and information to retail investors. In theory, art funds could provide access to the art market by using crowdfunding platforms to sell shares in art portfolios, and use data analytics to identify promising art investments. Perhaps they could even create an “art index fund,” and enable retail investors to invest in the art market as a whole, rather than a particular artist or portfolio.
But in practice, fintech is unlikely to make art funds a wise choice for retail investors or most institutional investors. The promise of access and information is a chimera. Art world insiders typically have no incentive to give art funds access to the primary market, because plenty of private capital is available. Data analytics are useless without accurate information. And an “art index fund” would be like investing in lottery tickets, because only a vanishingly small number of works have any value on the secondary market, and even fewer increase in value. Unless the art market becomes more transparent, fintech probably has little to offer potential art fund investors.
Brian L. Frye,
New Art For the People: Art Funds & Financial Technology,
Chi.-Kent L. Rev.
Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol93/iss1/4