Here at Currensee towers, we talk about alternative investing a lot: we talk about how good alternative investments are uncorrelated with traditional investments, we talk about how spot Forex is an alternative investment, and we love to talk about how a diversified portfolio of Currensee Trade Leaders can be an alternative investment.
Recently, there's been some discussion in the media about investing in art, specifically contemporary art. (If you're not up to speed, "contemporary" art mean art by living artists, or at least artists recently living.) It seem on the face of it, you can't get much more alternative than art. Let's take a closer look.
First off, there's a difference between buying art for an investment and investing in art. Investing in foreign currency doesn't usually mean having stacks of euros and yen stashed around your house any more than investing in gold or pork bellies means having those things in your house. It turns out that there are funds that buy and sell the art so you don't have to. You miss out on the "dividends" of enjoying the works of art and impressing visitors, but you also get a fund manager making the choices for you and diversifying the portfolio or collection of art, most likely more than you could do on your own. But the problems of actual art ownership still fall to the fund, as Forbes puts it,
... the real problem with art funds is this: While holding art doesn’t produce annual returns, art funds incur considerable annual expenses, including storage, maintenance, insurance and transaction costs...
As you might expect, people who want to enjoy the art are not always the same people who want to enjoy the investment results of art. More from the same Forbes piece:
Of the 2,000 affluent individuals that Barclays surveyed globally for a June report, “Wealth Insights: Profit or Pleasure?, ” only 10% said they bought fine art purely as an investment. “ Most are buying for their own enjoyment or for cultural or social reasons,” concludes Davies.
Some would call art an alternative investment because it's relatively illiquid, even in an investment fund format, fine art works are thinly traded. Are they uncorrelated to the broader markets? That's harder to say, since many wealthy art buyers are probably getting their disposable art-buying income from the profits of their investments in stocks, bonds, businesses, and real estate. Ask any art dealer what happens to their business when the stock market tanks, and I think you'll have your answer.
Both Reuters and the New York Times posit that the new super-rich, tech entrepreneurs, are not buying art like prior generations did. The Times says it's because they feel excluded from the art world,
And considering their net worths, technology innovators and the venture capitalists who back them are not collecting much art, according to people in both the tech and art worlds.
The Wall Street Journal suggests that wealthy techies are more likely to buy into art that's digital or conceptual, because it speaks to their areas of expertise more than conventional media.
Reuters comes back and says that tech company investing is just as insular if not more so:
...start-up culture is in fact one of the very few areas which is less transparent than the art world. You need to be invited to a tech party; gallery openings, by contrast, you just turn up to. If you want to buy the work of a certain artist, then with a little bit of diligence and persistence you can probably manage to do so somehow. And it’s downright easy to phone up the gallery and at least find out how much that artist’s works cost. If you want to invest in a certain start-up, by contrast, doing so is pretty much impossible unless you know the right people. And valuations aren’t kept quiet so much as they’re kept absolutely secret.
Venture Capital and Private Equity certainly qualify as alternative investments, so it seems that fine art might also fill the bill. As we noted here last month, wealthy investors are often attracted to mysterious investments with uncertain contents and fancy managers, so it seems not so far-fetched they might buy into a fund of contemporary art they don't understand either.
There's room in a good portfolio for almost anything if it's allocated responsibly with regard to your other investments and personal financial goals. Is art an alternative investment for you? We're thinking probably not, unless you know a lot about it or have a fund manager or financial adviser who does. Or unless you really just want to look at it on the wall.