Basics of Investing in Art Funds

Start easily investing in art funds today with Masterworks!

Many investment opportunities beyond traditional stocks and bonds are available. Alternative investments provide unique opportunities for investors to diversify their portfolios away from stock markets. It also allows investors to potentially bring their passion into their investments.

Art enthusiasts may enjoy investing in art to grow their portfolio and partake in the art world. However, finding and buying high-quality art is not attainable for everyone. Finding and identifying investment-grade art requires a lot of capital, connections and time. Investing in art funds allows a wider range of investors to gain exposure to the art market and its benefits.

What are Art Funds?

Art funds are structured much like other investment funds. They are collections of art that investors can buy partial ownership in. Fund managers will use investors’ capital to buy blue-chip art. As the art appreciates and is sold, investors will get their share of returns.

Art funds aren’t traded on the public market and can only be found through private companies. And investors won’t be able to take physical ownership of the art. But if having the physical piece isn’t important, art funds may provide a lot of benefits. It’s a great way to diversify your portfolio with a professionally managed fund, so you don’t have to actively find and buy the art.

How to Invest in Art Funds as an Alternative Investment

Does an art fund sound like a great addition to your portfolio? Here’s how you can invest in art funds.

Researching and Selecting the Right Art Fund

Just like any investment, you should conduct thorough research of the fund before you invest. You’ll want to consider the management team and their track record to ensure you trust them with your capital. If possible, talk with other art investors about the experiences they had with the business and management team.

You should look at the fund itself. Consider its performance over the past few years and ensure its returns and investment strategy align with your goals and risk tolerance. Because art funds are private investments, it may be difficult to conduct due diligence. To ensure you’re getting your money’s worth, you may want to work with an art appraiser to verify the quality and worth of the assets in the fund.

Setting Investment Goals and Risk Tolerance

Consider your goals for your portfolio. Are you trying to save for a short-term goal or build long-term wealth? Whatever it is, ensure the terms of the investment and rate of return match your needs. Additionally, consider the investment strategy of the fund and its level of risk. Art can be a risky investment, so an ambitious art fund may not be the right fit for a risk-averse investor. 

Assessing the Fund's Art Collection

Always ensure you are protecting yourself and your capital. When considering an art fund, don’t take the word of the managers on how much the art held in the fund is worth. Work with a third party to verify the worth, authenticity and appreciation potential of the art held by the fund. This will help you feel confident before investing in art funds. For example, when evaluating art, you should consider its condition, rarity, reputation of the artist and historical significance.

Understanding the Cost of Investing in Art Funds

Every fund will have some sort of fee, but the type and amount will vary. Ensure you fully understand the fees that are associated with a fund, such as management fees and transaction costs, and consider how they will affect your overall return. Fees will decrease overall returns but in turn, provide you with an expertly managed fund that may perform better than trying to collect art individually.

Investment Horizons and Exit Strategies

Because art funds aren’t traded on public markets, exiting the fund can be tricky. You’ll want to have an exit strategy in place before investing. First, consider the options the fund provides for exiting the investment. Most art funds are long term and will not allow investors to sell their shares to another person. Investors are expected to stay within the fund for the outlined investment horizon, typically three to five years. Understand the fund’s approach to exiting and ensure you are comfortable with your options and can commit to a long-term investment. 

Performance Monitoring and Reporting

Art funds are actively managed, but you’ll want to continue to monitor their performance. Ask the fund manager how they report their performance and communicate the fund’s activity to their investors. You’ll want to be given monthly statements, performance reports and updates regularly so that there is transparency about how your capital is being used. Compare your fund to art investment indices, such as the Artprice 100 index, and other markets like the S&P 500 to ensure you’re getting a fair return on investment.

Pros of Investing in Art Funds

Investing in art is a great opportunity for many investors. It allows people to bring their passions into their finances, diversify their portfolios and engage in art and culture. However, investing in art is expensive and time-consuming. It can also be daunting for a new investor.

Art funds make this opportunity much more accessible. They have a lower minimum investment requirement and provide exposure to an expertly curated portfolio of art. Investors in an art fund won’t have to spend time researching, going to auctions and getting appraisals to invest in blue-chip art. Plus it provides instant diversification because investors get exposure to several pieces with one investment. And though the investor may not be hand-selecting the art, they are still contributing to the promotion and preservation of art and culture. 

Risks of Investing in Art Funds

Art is risky. Diverse funds offset this risk a little but not completely. Consider these risks before investing in art funds.

• Market volatility could cause a sudden and unexpected decrease in a piece’s value. Trends are always changing and what was in demand one day may not be the next. 
• Illiquidity means you won’t be able to exit the investment if the market begins to turn. That’s why it’s crucial to fully trust your fund management team and agree with their investment strategy.
• The lack of control may not be for all investors. Ensure you’re confident in the fund and are OK with remaining passive.

Where to Invest in Art

If an art fund doesn’t sound like the right fit, you can explore other avenues to invest in art. You could purchase art on your own by attending art shows and auctions, just ensure you work with an appraisal to verify authenticity and value. You also could use an art investing platform like Masterworks or Yieldstreet, where you can buy fractional shares of high-quality art.

Invest in Culture for Enticing Returns

Art is an enticing market for many people. It offers the potential for strong returns and allows you to take a direct role in fostering creativity and preserving culture. For many people, it’s more than a means to build wealth; it’s also an important service to society.

Art funds make this unique opportunity available to a wider range of people. It requires less capital and time commitment but provides all the benefits of art investing. Just ensure an art fund aligns with your goals and needs before investing in this illiquid product. For personalized advice and recommendations, discuss how an art fund would impact your portfolio with a trusted financial adviser.

Frequently Asked Questions