Key Takeaways

• Art funds are generally managed by an advisory firm or a professional art investment management. Art fund managers receive a management fee, including a part "of any returns delivered by the fund."
• Current art funds use artificial intelligence, digital platforms, and advanced databases "to better buy and sell works that will gain value."
• In November 2021, Yieldstreet launched a collection of funds called The Art Equity Platform. These funds hold a portfolio of art pieces created by "major post-war and contemporary artists." These funds have a minimum investment of $10,000 and a holding period of five years, "with two one-year extensions."

Introduction

I. How Current Art Funds Work

What are Art Funds

•  Art funds are investment funds that are privately offered to generate returns through acquiring and disposing of artworks. Art funds can be private or hedge funds.
• Art funds "allow investors to partially own pieces of art" without having to take possession of the physical artwork.
• Art funds are generally managed by an advisory firm or a professional art investment management. Art fund managers receive a management fee, including a part "of any returns delivered by the fund."
• The characteristics of art investment funds are diverse and varied. Although all art funds have some degree of a buy-and-hold strategy, art funds are generally varied in terms of investment focus, aggregate size, duration, portfolio restrictions, and investment strategies.

Where are Art Funds Set Up

• Some art fund managers such as MasterWorks collect "blue-chip art at auctions on behalf of its investors."
• MasterWorks then create a holding company for every artwork for the purpose of acquiring, storing, promoting, and reselling the artwork for profit.
• Afterward, the art fund manager applies for SEC registration of the holding company. Once the company is registered, the art fund manager then "issues shares to those who want to invest in that" particular piece of art.
• This process of securitizing artwork allows for more affordable art investment. It also allows for a more liquid market for the artworks' shares. Through this, investors are able to buy and sell art shares more easily.

Other Tasks of Art Fund Managers

• Before registering the holding company at SEC, Art fund managers such as MasterWorks need to conduct "research to identify artworks with a good chance of increasing in value."
• In addition, the art fund manager also oversees every necessary maintenance "to keep the artworks in pristine condition." In return, investors pay art fund managers a certain fee for that service.

How Big Funds Buy and Sell Art Pieces

• MasterWorks acquires art pieces at auctions. 
• Big art funds also have an art expert advisor. For example, investment firm Yieldstreet is using "its years of proprietary data and research" from Athena Art Finance "to identify the best works by the top artists likely to see higher prices."
•  Athena Art Finance, an art loan maker, is Yieldstreet's advisor when it comes to art investment funds. Yieldstreet provides retail investors with assets to invest in that are usually reserved for the extra rich.

Strategy in Selling Art Pieces

• Current art funds use artificial intelligence, digital platforms, and advanced databases "to better buy and sell works that will gain value."

II. Investing in Art Funds

How Investors Invest in Art Fund

• The investor has to buy fund shares to invest in an art fund. Fund shares have a minimum entry threshold.
• MasterWorks allows investors to purchase artworks shares in $20 increments. MasterWorks is the only art fund manager that allows this. The investment entry in MasterWorks is way lower compared to traditional art funds.
• Those interested in investing in MasterWorks art pieces can do so through apps like Robinhood.

During and After the Investment Period

• During the investment period, fund managers create a collection together with experts in the art field. A project is normally initiated to enhance the value of artworks in the collection.
• After that period, the artworks are resold, and the proceeds are divided among the investors "after deducting the costs of managing and administering the fund."

How Investors are Treated

•  Traditional art funds offer people an opportunity to invest in a fund that has multiple artworks. MasterWorks deviated from the traditional art funds. MasterWorks offer people an opportunity to buy shares of a single artwork.

• Investors who bought shares of a particular artwork can "sell these shares in an easy-to-use secondary market."
• Alternatively, investors can also just wait for the art fund manager to sell the artwork. MasterWorks investors will receive pro-rata proceeds once MasterWorks sells the artwork they have invested in.

Length of Investment Required

• MasterWorks investors are also not "locked into the fund" for a specific period. There is no required length of investment in MasterWorks.
• However, MasterWorks still expect to take hold of the artwork for about three to ten years. According to Masha Golovina, MasterWorks' Director of Acquisitions, "We expect to hold onto each painting for roughly three to ten years, and we do advise our investors that these are illiquid holds. We have a trading platform for our investors; but, I think that most people who come to us do actually intend to hold on to their shares until we’ve completed the eventual sale of the artwork."

Two Kinds of Art Fund Investments

• Generally, there are two kinds of art fund investments: the long term, which lasts for 8-10 years, and the short term, which lasts for five years or less.
• Long-term art fund investments cover the entire art history period, while short-term art fund investments are focused on contemporary art.

What Art Funds Do

• In November 2021, Yieldstreet launched a collection of funds called The Art Equity Platform. These funds hold a portfolio of art pieces created by "major post-war and contemporary artists."
• These funds have a minimum investment of $10,000 and a holding period of five years, "with two one-year extensions." These funds aim for a 15-17% return, net of fees.
• If Yieldstreet is into contemporary artists, MasterWorks on the other hand only focuses on artworks of established artists, including Andy Warhol, Banksy, and Claude Monet.
• One of the artworks recently bought by MasterWorks is the Selina/Star painting by Barkley Hendricks. MasterWorks bought this artwork at an auction. The painting is shown in the image below.

 

Source

Research Strategy