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Art fund industry struggles to emerge from the gloom

A further seven funds have been abandoned and even the Fine Art Fund has disappointed

Under a cloud. Photo: © Tom Kelly, 2010

The signs are that the beleaguered art fund industry, after the storm of the recession, is still in the doldrums. Further closures, a slow fundraising environment and lower-than-expected returns are compounding the effects of the credit crunch, which had already claimed several victims.

Art funds pool money from investors to buy works. The number of funds that exist is “difficult to ascertain; they are privately offered investment vehicles, which makes it hard for anyone to know about them all”, says Enrique Liberman, the president of the New York-based Art Fund Association.

Of the 36 funds that Noah Horowitz, now the director of the Armory Show art fair, lists in the appendix to his 2011 book Art of the Deal, ten had been abandoned by the time it was published and a further seven have since joined them: Advanced Capital Group’s contemporary art fund, Caiac’s art fund, Castlestone’s Collection of Modern Art, Emotional Assets’s Fund I, Meridian Art Partners’ emerging art fund, Tosca’s photography fund and Sharpe’s art fund. At best, there are probably now 20 functioning art funds worldwide.

Disappointments

The managers of the funds that have survived say that they have learned from previous mistakes. Philip Hoffman, who runs the Fine Art Fund Group, ostensibly the most successful art investment group, says that he has had to be “realistic” about the net returns of his first fund (which launched in 2004), expected to be around 6%, despite gross returns of nearly 19%. Hoffman says that administrative costs and currency fluctuations had a bigger impact than expected. Plus, he adds, “my mistake was investing long-term in Old Masters, which have done nothing”. He says the group is raising a new “big fund” of around $100m.

“When we started our fund [in 2009], we didn’t know what to expect,” says Javier Lumbreras, the chief executive of the Artemundi Global Fund. “We pretty much put it together and hoped for the best. Now we are perfecting our model.” He had hoped to raise around $150m for his first fund, but says this stalled at around $100m. He is closing this fund early, although he says that this is because it has fewer than 40 paintings left, worth $38m. His next fund will be longer-term and allow investors to take out some of their money during its lifetime, addressing the thorny liquidity problems that have threatened many other art businesses.

Others have reduced their expectations. “We are still alive and kicking—that’s an achievement,” says Massimiliano Subba, who manages the Anthea Contemporary Art investment fund, based in Switzerland. He is responsible for around €30m of investment: the fund includes works by John Stezaker, Mario Merz and Elly Strik. Friedrich Kiradi, who manages the Art Photography Fund, says that its fundraising has been delayed as the group is changing its domicile from the Cayman Islands to Luxembourg. The fund launched in 2008, aiming to raise around €70m, but is holding less than €10m of funds.

Direct investment

One major change in investor behaviour has been a trend across all markets in favour of direct investment. In art terms, this “provides greater transparency and physical control over the asset”, says Randall Willette, the founder of the advisory firm Fine Art Wealth Management. By cutting out the third party, “the investor can ultimately pull the trigger on when to sell”, Liberman says, although “art is still illiquid and it takes time even to sell blue-chip works”.

The Fine Art Fund Group has been growing its “private managed accounts” business over the past 18 months, particularly in the Middle East. By essentially acting as an art adviser, Hoffman says that the cost of managing other people’s money is cut out, enabling more flexibility with his own fees. He says, however, that he can still charge the art fund’s traditional “2 and 20” (where 2% is paid up front as a management fee together with a 20% performance-based fee).

Despite the challenges, those in favour of art as an investment are putting on a brave face. Liberman says: “Lessons were learned after the market crash [of 2008-09], such as how much of a fund should go into one artist, or how quickly the fund’s capital should be deployed into the market. But there’s a lot of sophistication in investment strategies for art evolving now in the industry; this could be an exciting time.”

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