Financial instruments for the art market by BV Vaidyanath and Shameek Chakraborty (Student Project)

Submitted to Prof. Ajay Pandey

Art has been gaining acceptance as a valid asset class for investors, primarily due to two reasons. First the return from investments in art has been comparable to return from investment in the stock market, second, the correlation of art with stocks and bonds is low, and this allows investor to diversity their overall portfolio through investments in art. Investment in art through direct purchase entails many risks. Direct purchases of paintings limits the diversification within the various art segment. It also presents many issues of valuation, transparency, transaction costs and liquidity to the investor. A viable alternative is to invest in art funds, which mitigate many of the risks present in direct investments. Art funds are typically structured similar to private equity funds. Such funds collect capital from investors to from a fund pool, from which purchases of many works of art is made. Art the end of the fundHs life, the capital and the profits from sales of these items of art is returned to investors. Such funds charge a management fee as well as a commission from profits, These funds however are narrowly targeted they have a high minimum investment requirement, are targeted at high net-worth individuals and institutional investors, and do not cater to varying risk appetites and investment horizons of investors. In addition, they do not address liquidity concerns that investors may have.