The high rate of growth of the art market, and particularly the explosion of the Chinese market, made art a very interesting class of asset.
Private investors who have recently begun diversifying their investment portfolios through the acquisition of paintings, sculptures, installations and photographs. Moreover, a number of economists have developed and analysed specific economic indicators showing that artworks can, in some cases, make a portfolio more efficient. The reason is that this type of investment is not related to stock market trends and is therefore less affected by crises.
As a result, thanks to interesting financial engineering, the market has created innovative tools for investing in art. An interesting opportunity is the use of derivative contracts that allow you to purchase art – usually from emerging artists – at a fixed price within a specific period. This is, in fact, a call option that allows the purchaser of the option itself the right, (but not the obligation,) to buy a work (the subject), within a set date, at a predetermined exercise price. To acquire this right, the investor pays a sum, defined “premium”.
In 2010, the MurmurART gallery in London exploited this opportunity and, with the assistance of the Ferguson Solicitors law firm, offered three option contracts to the value of GBP £2000 each, allowing investors to redeem, within ten years, a work by the young artist Tom Saunders, for the price of £1.
In this case, the contract prepared by the law firm contains also clauses providing investors with protection in case the artist stops producing or dies prematurely. In a nutshell, if the artist becomes famous, investors will have made a deal. If not, their investment will be unprofitable.
This system allows emerging artists to finance the beginning of their career and to concentrate on producing works of art, while investors can diversify their investments by buying a kind of art derivative.
Time will tell us if these initiatives, which balance the needs of art with those of finance, will be fruitful and increase in number.
Maelström Art Gallery
Nothing on this article shall be considered a solicitation or offer to buy or sell any security, future, option or other financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction.
Cover Image: General Impression © Art Basel
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