On November 14, 2013, an Andy Warhol piece depicting the immediate aftermath of a car crash sold at Sotheby’s in New York City for $105 million (Associated Press). The 8-by-13-foot painting titled “Silver Car Crash (Double Disaster)” depicts a twisted body sprawled across a car’s mangled interior. Its hefty price tag stems from the prestige of the artist, the vividness of the piece, the connection with the viewer, and many more personal reasons. Potential clients might describe how the piece connected with them on an extremely personal level or how the piece will go well in their home. However, a rising majority might refer to the annual growth of the art, the estimated earnings in 10 years, and the estimated liquidity of the piece. They might refer to the piece as risky, safe, or moderate depending on these circumstances. This growing majority of economical thinkers primarily consist of investment groups, known as hedge funds. Through strategic purchases and the creation of an art-specific market, art is becoming one of fastest-growing securities in the modern day.
When reduced to its simplest form, hedge funds have a basic goal: invest smart and make money. Although there are many factors to the operation of this, this concept is now being applied to art. In order to understand how the art market works, one must understand how any regular securities market operates.
A securities market consists of buyers and sellers who publicly report various transactions (O’Neil 10 – 30). These transactions are entered into a database and reviewed by analysts, who eventually make moving averages and market trends. The transactions also portray how the market is doing and through this information, analysts can determine if current numbers prove that it is a bull (fast-growing) market or a bear (slow-growing) market. These trends are visible to the public eye through security indexes such as the Standard and Poor’s 500, the NASDAQ, Dow Jones, New York Stock Exchange, and many others. By categorizing the market, analysts will advise investors on how to yield maximum profit. The investor can then decide if he or she wants short-term profit or long-term growth. Certain securities trend towards short-term profit while others stem for the latter. A buyer chooses what type of investment he wants depending on liquidity, which is how quickly a security can be converted to cash.
Before choosing an investment, a buyer must look at risks. Risks include competition, operating costs, environmental factors, and depreciation. Through analytical research each risk can be made into a negative number. These negative numbers will combine with costs, forming the actual net value of the security. After computing risks, costs, the market trend, and potential earnings, an investor can decide if he or she wants to purchase that security. Since hedge funds primarily deal with millions of dollars, research and analytical thinking is heavily needed before making an investment. Therefore, any publically traded exchange system has three parts: a buyer, a seller, and an index.
Although 30% of the world’s art-tailored investment management groups are located in China, there are many hedge funds located within the United States (Sommer). Amongst the leaders of this group is the Art Fund Association LLC, located in Midtown, Manhattan. The Art Fund Association focuses on a variety of art including sculptures, paintings, and photographs. They use modern evaluation techniques before investing just like a regular hedge fund. However, there are distinct differences between common securities and art securities.
The art market is portrayed through the Mei Moses Foundation index. Just like a regular index, the Mei Moses Foundation displays market trends based on transactions. The main difficulty faced by the Art Fund Association is that many art deals are private, held by private auction houses that do not release their transaction details. This creates a skewed market, as all transactions are not visible. According to a representative from ArtVest, an art market advisory firm, “The key to investing in art is to fully understand the marketplace. Art requires a unique understanding of the drivers of connoisseurship and collector demand which establish value.” Therefore, there is no completely accurate depiction of the art market. To combat this, the Art Fund Association hires both finance professionals and art historians (The Art Fund Association LLC). Working together, both groups make projections on art pieces. They do this by examining similar items in the market and comparing them to the item at hand. Analysts can also examine the item’s buyer frequency and current market trends to eventually make the projection.
Apart from projections, the Art Fund Association must examine a piece to determine risks and costs. For example, a potential risk of a Van Gough painting may be that the piece is subject to weathering due to its age. By using the Mei Moses Foundation index, this particular hedge fund will examine how much equally old and elaborate paintings are worth in the current market. They can also check to see if similar paintings have increased or decreased in value, in the last five or ten years. Analysts can then determine the numerical risk of the painting depending on its current market.
However, the question still hovering over all of this is: what happens when a piece is truly unique? This is where the art historians have a strong input. Through their detailed study of various pieces and their knowledge of market trends, the art historians are able to examine a piece on its unique features and thus determine a value. Although this may sound subjective, these art historians are using market trends and theory to come to a conclusion. Investing is not a definite form in any market; it is largely based on human nature and theory.
The rising art market is proving to be a profitable arena for those seeking to diversify their investment portfolio. The Andy Warhol painting that sold for $105 million was projected a similar price by the Art Fund Association. Therefore, the organization is credible and highly profitable for those seeking to venture into the uncommon.
