How art is gaining traction as an alternative investment option

Art is an unconventional choice for investors, in that it is not easily traded like more traditional asset classes such as equities, bonds, cash, commodities and so on. It is highly illiquid, as artworks cannot be bought and sold quickly on exchanges, and there are high costs involved with the purchase and sale of art, including appraisals, insurance, transport, storage and auction fees.

Why then are so many investors turning to the world of art as an alternative investment? The value of art is a matter of perception, based on the work’s history and the prestige and desirability of the artist – there is no underlying asset as with stocks or commodities. As a result of this, art is a distinctive commodity that does not correlate closely with the behaviour of stocks and bonds markets, i.e., the value of art is not greatly affected by global economic conditions. As a result, investors are now starting to recognise art as an attractive alternative asset class that offers a great option for diversification and a hedge against volatile markets.

Wise investments in the right art will almost always reap rewards, despite the high costs involved, as demand is increasing for rare and sought-after artworks. This has been compounded in recent years with the proliferation of ultra-high-net-worth individuals looking for an attractive and fashionable way to store their wealth.

There has also been a significant increase in activity by culturally-inclined sovereign wealth funds from Middle Eastern countries such as Saudi Arabia, the UAE and Qatar with very deep pockets and an insatiable appetite for the great works –the most famous example being Saudi Arabia’s purchase of Da Vinci’s Salvator Mundi for almost half a billion dollars, the most expensive art purchase in history.

So far, all of this relates to buying actual pieces of art as a physical asset, but as I’ve already mentioned, art is a highly illiquid asset, so it is not recommended for those looking for an easy exit strategy or fast cash. In addition, buying expensive art is not just a case of picking a Monet up at an auction and banging a nail into your wall at home to hang it on. You need a suitable, atmosphere-controlled and secure space where it will be safe from environmental damage and robbery. And then there’s the matter of insurance. All of this represents a considerable outlay to anyone looking at starting an art collection.

However, what are your options if you do not have hundreds of millions of dollars available to sink into a collection of works by the masters? Well, the good news is that a number of art-based funds have been created to cater to investors looking to get involved in art. Art funds can make sense for non-HNWI investors because they offer pooled buying power, diversification and professional management. These funds employ specialists to handle the procurement, transportation, storage and, when the time is right, sale of high-value artworks on behalf of the fund’s investors.

The Fine Art Fund Group in London, established in 2001, is one of the older and larger funds, with more than $350m in assets under contract. Newer and smaller vehicles include the $18m, Malta-domiciled Fine Art Invest Fund and the $20m Tiroche DeLeon Collection, registered in Gibraltar.

A good indicator of how the market is performing is the Artprice 100 Index, designed as a portfolio of artworks representing the 100 most important artists on the market, based on auction sales of particular artists over the previous five years.

However, as the fund is a theoretical exercise, and not based on actual ownership of part or all of any artworks, there are no funds or ETFs based on this index. Another option is to invest in the shares of the top auction houses themselves, with famous names such as Sotheby’s, Phillips and Christie’s offering an attractive alternative to investing in artwork.

Chaddy Kirbaj is the vice director at Swissquote Bank’s Dubai Representative Office