Art as an Asset Class
In April, I wrote a literature review on art as an asset class for a Venture Capital & Private Equity course in my Masters program. It required a bit of convincing my professor that art is a private equity asset, but hey - it worked out.
Below is the link to the PDF (with pictures!). If you’re short on time, here are 10 key points:
Art’s Value Drivers – Unlike traditional assets, art’s value derives from intangible factors such as provenance, authenticity, condition, exposure, and quality, as well as artist reputation and market context, rather than intrinsic utility or income generation.
Market Structure – The art market consists of a primary market (first sale by the artist) and a secondary market (resales via galleries, dealers, and auctions), characterized by opacity, illiquidity, and reliance on reputation rather than regulation.
Empirical Returns – Most studies find that art delivers modest real annual returns of about 2–4%, below equities but sometimes above certain fixed-income securities.
High Volatility – Art exhibits significantly higher volatility than stocks, with standard deviations often exceeding 40%, making it a risky asset class despite its cultural appeal.
Portfolio Diversification – While correlations between art and financial markets vary, certain segments (e.g., high-end art) may provide downside protection in market downturns, but diversification benefits are conditional and inconsistent.
Investment Channels – Investors can access art through direct purchases (primary/secondary markets) or indirect vehicles (art funds, fractional ownership). Each has trade-offs in liquidity, costs, expertise requirements, and enjoyment of ownership.
Transaction Costs and Risks – High transaction costs (commissions, insurance, taxes) and risks (forgery, theft, damage) materially reduce net returns but are often excluded from published performance figures.
Methodological Challenges – Repeat-sales and hedonic regression models dominate art return measurement but suffer from selection bias, data gaps, reliance on auction data, and lack of a standardized investable index.
Non-Financial Returns – Art offers “psychic dividends” such as aesthetic enjoyment, social capital, and cultural prestige, which strongly influence investment decisions but are hard to quantify financially.
Future Research – Key areas include analyzing money laundering’s role in price formation, leveraging blockchain for provenance tracking, studying fractional ownership platforms and NFTs, and exploring art-backed lending.
As always, thank you for sharing your thoughts.