Can art derivatives revolutionize the market?

The Financial Times, UK published an interesting article by Matthew Vincent on a peculiar sidelight of art buying, yet unexplored: future and options. This point was raised in the context of a ‘Self-Portrait with a Palette’ by Édouard Manet’ sold for a predetermined price before it was put on sale in Sotheby’s London auction in June.

Throwing light on the art investor selling at Sotheby’s, the news report mentioned:

“He is someone who should know all about the advantages of using options, futures and other kinds of derivatives: Steven A. Cohen, founder of the $16bn hedge fund SAC Capital Advisors. “Instead, though, he trades art at auctions driven by market sentiment, and in private sales prone to comical accident. For instance, he got the Manet self-portrait from a Las Vegas hotelier for $35m-$40m, but had to cancel his $139m deal of ‘Le Rêve’ by Picasso after the same vendor inadvertently stuck an elbow through the canvas. Had he been buying and selling derivatives, making profits and avoiding losses would arguably have been much easier.

Meanwhile, a hedge fund manager seems to be combining both trading and art investing. The Paris-based hedge fund Quant Hedge CFO, Victor Lebreton, is also listed as the investment manager and president of the Art Hedge fund, which engages in both foreign exchange trading and investments in ‘fine art & art derivatives to sustain cultural creation’.

However, neither Ferguson Solicitors nor the French fund is likely to generate enough buzz to give anything resembling a sustainable futures market. The article concludes:

“In theory, art derivatives sure would bring far greater liquidity as well as enhanced efficiency to the market that would mean potential cost related benefits for both
collectors and investors. Art derivatives certainly can revolutionize the art market by offering an easier and simpler way for managing the risk and return of art."

Fund managers, dealers and index compilers would first be required to get together. According experts, there’s nothing to stop this. To have in place a ‘true’ hedge for art, what needs to be developed are derivatives with art as the ‘underlying’.