As an asset class, modern art has been the preserve of the brave or foolhardy. But recent high prices for artworks are creating something of an investment bandwagon. Last week, Rothko’s White Centre set a record for post-war art sold at auction, selling at Sotheby’s for $73 million. The previous record, for a Bacon painting of a pope, was 10 minutes old.
What’s driving the modern art frenzy?
One simple answer is that the world’s rich are getting richer, thanks to sky-high commodity prices and stock markets. New multi-millionaires, from emerging market moguls to buyout fund barons, want baubles they can show off, and maybe make a neat return on later. The more entrepreneurial they are, the more they lean towards risky modern artists.
At the moment, the modern art market is in a virtuous circle. More wealthy people means more buyers. Meanwhile, iconic works have a scarcity value since they come to the market rarely, if at all. The vogue for philanthropic gestures means many works are also being donated to museums’ permanent collections, removing them from the financial system altogether.
But the art world has been here before. In the late 1980s, Japanese buyers piled recklessly into paintings by Impressionist painters. Many of them used an overheated property market to borrow cash. When property crashed, art prices went with it. The European Impressionists index, compiled by Art Market Research, more than halved in a year.
Can the new generation of investors hedge their taste for risky art? Well, you can’t short a Rothko, of course. But you can short some of the macro factors driving global wealth creation, and fuelling the appetite for his paintings. That’s what one new Guernsey-registered hedge fund, the Art Trading Fund, hopes to do using exchange-traded options.
But the art market’s new highs aren’t just the result of high commodity prices. Much of the demand comes from hedge fund managers, deal makers and private-equity partners, high on fees. Maybe a more specific hedge would be to short these sources of global wealth, too. ”Buy Bacon, short Blackstone” might soon be the smart trade.