Pooled art assets is the new trick for funds

Art lovers have long considered themselves to be belonging to a more elite category than stock market speculators. Now though, their worlds and identities are apparently colliding with a new segment of financial entities worldwide keen to sell shares in pools of artworks, according to media reports.

It makes for a real odd combination. Many investors favor transparency, dealers generally prefer secrecy. If the former are tilted towards asset gathering, art dealers rely on exclusive holdings. As the prices of major works have gone up, niche portfolio managers are bringing out art funds, hoping their underlying works and shares will both appreciate in value.

What makes art experts a touch nervous is the fact that these funds bear similarities to opaque investments like asset-backed securities and derivatives that suffered during the global financial crisis. Bang in the middle of this debate are proponents, such as the art research firm Skate's, looking to legitimize the emerging trend by influencing new art investors.

The pooled art assets’ transparency and valuation are two key issues that impact art securitization. Thanks to volatile stocks and bond market, wealthy overseas investors are turning to tangible assets like art. Alert financial firms are capitalizing on that shift of interest. Through these funds, investors can own artworks sans the large fees and taxes generally associated with full ownership. A few money managers promise returns as high 20 percent.

The domain, with roughly $300 million in assets, is small albeit fast growing. The theme behind these art funds is rather simple: A group of big investors put up funds to help a money manager purchase paintings. Smaller investors will buy ownership units, their values tied to the underlying art. For the privilege, they are asked to pay fees of 5% of the assets and 20% of the profits.

It’s a private market! When an investor wants to cash out, he or she has to trade the stakes. This is a historically unregulated arena. Some experts feel that art funds, popular in markets like India, Russia and China, will draw the wrong element, keen to keep money out of bank accounts.