As the global economy begins to warm up interest in art funds is also picking up, especially in the world’s new economies. 3030 Press speaks with Dr. Clare McAndrew, editor of the newly published Fine Art & High Finance, about the resurgence of art funds in China.

Q: What is the purpose of an art fund?
I think it’s important how you define a fund; there are charities, non-profit funds, collectors clubs and other ways that people raise money in the art market, but an art fund I’m talking about is an investment vehicle whose purpose is to produce a financial return. The main purpose of an art fund is that they offer investors the opportunity to use their pooled money to purchase a wider selection of high-quality works of art. They vary in structure but generally allow investors to achieve a diversified art portfolio, to take advantage of the portfolio’s low correlation with traditional asset classes, and to use expertise and active management in art-purchasing and divestiture for a variable management fee.

Q: How many art funds are there in China?
The one I’m familiar with is Hua Culture Company Ltd, via Minsheng Bank, plus a few others attached to banks in China and Taiwan and discussed at the International Forum on Chinese Antiques and Artworks Auction [recently hosted in Beijing by the China Association of Auctioneers]. There are probably only about 30 real art funds in existence at the moment globally and only a handful are regulated. The rest are private equity style funds.

Q: Who invests in art funds?
Basically those individuals who do not have the space, specialized knowledge, interest, or inclination to buy and hold individual works of art but still want the benefits of investing in art. Investing in art through a fund, rather than directly, holds a number of advantages, especially for the non-collector who appreciates the financial characteristics of art but has no interest in acquiring “the real thing”.

Q: What sort of people set up art funds?
They vary a lot. Most are unregulated. Ones like the Art Trading Fund [which closed in December 2009] – the first ever art hedge fund – was regulated through the Guernsey Financial Services Commission, but there are only around 10 fully regulated funds worldwide.

Q: How are art funds valued?
There are various approaches to calculating net asset value. Most use appraisals by an auction house or professional appraiser and compare relative value to similar works. Chinese contemporary art peaked in 2007 and on aggregate has lost value since then. I think there has been a big variation in the quality of works on the market in the last few years and quite a few speculators, particularly western investors.

Q: Are art funds generally successful?
It varies. The more diversified ones like The Fine Art Fund have been more successful, although we’re relying on what they say because they are not regulated. Ones like ATF, which concentrated on the contemporary sector obviously have not done as well.

Q: Can art funds distort the art market?  
Yes, although none have really done it yet. But they can certainly support works of the artists that they invest in at auction by bidding up prices. The obvious risk is that they can get stuck with a pile of the artist’s work, which has happened to some funds.

Q: Do you believe the number of Chinese art funds will continue to grow?
The art market has been on a very rapid growth path in China. I think once the infrastructure and regulatory framework stabilises there will be more appetite for these vehicles in China. There are still a lot of problems with fakes and forgeries in the market and auction houses do not bear any responsibility for these at present, but I know the Minister of Culture is determined to get rid of that loophole in the law. It’s just one example, but investors need to know they are putting their money somewhere safe.

Dr. Clare McAndrew is a cultural economist, investment analyst and author. She completed her PhD in economics at Trinity College Dublin in 2001, where she also lectured and taught economics for four years. She has worked for the UK Arts Council and in 2002 joined the US firm Kusin & Company, a boutique investment banking firm specializing in art investment. She returned to Ireland in 2005 and in 2007 founded Arts Economics consultants. Fine Art & High Finance is published by Bloomberg Press.