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Friday, July 23, 2004

A More Rational Art Market

Carol Vogel shills for Fernwood Art Investments in today’s New York Times

Fernwood is a new hedge fund, run by an experienced investment manager and supported by art market experts. It uses fine art as an alternate asset class to give its investors portfolio exposure outside the traditional stock and bond markets.

Vogel lends the company her byline to describe itself this way to Times readers.
Fernwood bills itself as the "first independent firm to develop a comprehensive suite of art-focused investment, research, advice and financial products," creating "multiple opportunities for sophisticated individuals and institutional investors to participate in the art economy."
She goes on to say that the company plans to invest $100 million to $150 million annually in art. Its investments will be made in eight market sectors, covering European old masters to emerging contemporary artists.

I have been seeing a lot of press lately claiming that the art market is overheated and ready for collapse. Is this another sign that the implosion is imminent?

Not necessarily.

Let me start by making a disclosure. I tend by nature to be a bear on financial markets. Maybe it was my Calvinistic upbringing, but I’m always waiting for the other shoe to drop, for the bubble to pop, for the good times to come crashing to an end.

So that’s why I’m surprised to find myself being bullish on the art market.

Some say that there are too many people collecting art and that there’s too much publicity about the market. They see investment funds like Fernwood’s or work done by companies like Art Capital Group as additional evidence that the art market today is akin to the tech stock market of the late 1990s—too many people paying too much money and trying to be too clever about funding things that won’t hold their value over the long term.

I’m not so sure. Until the last decade, the art market was one of the least transparent and most irrational around. Transactions were managed through dealers who operated secretly and withheld current and historical pricing information. The secondary markets did not share transactional information readily with the public and did not make historical pricing information available.

Today with the Internet it’s relatively easy for an individual to research the work of an artist and to find dealers for that work nationwide and even worldwide. Don’t like it that a New York gallery won’t allow you to purchase work by an artist because they’ve allocated all that artist’s work to their special clients? Email a gallery in Dublin that also represents the artist instead. Think your local dealer is asking too much for a print you like? Find another print from the same series offered by someone else at a lower price.

Historical pricing of objects sold on the secondary market is now available free or for relatively low fee through various sources. (See, for example, Sotheby’s Sold Lot Archive Search. Note to Christie’s: why aren’t you giving free access to past auction results too?)

Today dealer and pricing information is more transparent than it has ever been. That’s a key step in making the move from a closed, irrational market to an open and rational one.

Entry into the market by tertiary players, financiers, and others looking to capitalize on the value in art signifies another healthy trend. Over the last few weeks I’ve seen several interesting examples of free-market, entrepreneurial capitalism at work. The Artist Pension Trust is one example. Another is noted in a recent Artnet item about Sharon Louden’s venture capital approach to raising funds for her work by selling shares in it. (Follow this link and scroll down the page to the item entitled “Artist Sells Shares to Fund Work.”)

Of course there are downsides to all this interest and money flooding into the market. The law of supply and demand becomes more true than ever. As individuals look to art as an investment, they will tend to go after name-brand, blue-chip work (the GE’s, P&G’s, and Berkshire Hathaways of the art world), driving up prices at the top end.

But, over the long run, investors will bring transparency and rationality to the market as they demand information, services, and behavior that align with what they receive in the securities markets. This will benefit everyone interested in purchasing art, even those who buy in sectors of the market where supply is high and demand is low.



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