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investment funds

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Perhaps you’re interested in using an art investment fund to participate in the art market, but you’re a little cloudy on the basics.

Here’s how art investment funds work.

What is an Art Fund?

Essentially, art funds are privately offered investment funds that seek to generate returns through the buying, holding, and selling of art. As compensation, they are paid a management fee, as well as a percentage of the returns the fund delivers.

Beyond that, each art fund has its own characteristics, including size, strategies, holding duration, and portfolio restrictions. Also note that investors are dependent on the fund in terms of art selection and strategy. They have no independent say in terms of how any of that is handled.

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What Art Fund Managers Do

Investment management firms are typically made up of a blend of established art market professionals and investment advisors. Because art fund managers usually have capital of their own invested in the funds they manage, they line up their interests with those of their investors’. Or, said more precisely, potential investors can usually find a fund that lines up with their interests.

Fund managers’ responsibilities include:

— Looking for prospective acquisitions

— Raising fund capital

— Handling investor relations

— Taking care of fund administrative compliance 

— Providing loans to museums and mounting exhibitions to promote the portfolio 

— Storing and insuring the works

— Monitoring the art market as well as the fund’s artists

— Tending to the orderly disposition of the fund’s portfolio 

How Fund Managers Are Paid

Performance primarily determines the fees fund managers receive. Usually, such annual fees are between 1% and 3% of either the portfolio’s net asset value or the overall fund investors’ capital commitments. Art fund managers usually also charge a performance fee that comes out to 20% of any profits from the art portfolio’s disposition.

Art Fund Investment Strategies

There are an almost unlimited variety of strategies that managers can employ to invest in art.  Why? Because they differ from mutual funds and the like in that contract or law does not restrict them. The fact is that most art fund managers use varied strategic approaches in order to capitalize on opportunities and market trends.

It’s a Growing Marketplace

Most of the growth over the last few years has been pegged to investors’ collective realization that the art market continues to benefit from marked price appreciation. Meanwhile, traditional investments in stocks and bonds over the last decade or so have yielded comparatively lower returns. 

The number of art funds is also proliferating because of the recognition that, unlike with stocks, art investment is not subject to the ups and downs of the stock market. What’s more, the investor community sees that the lack of art market regulation offers unique investment opportunities.

Further, because an art fund manager’s compensation is largely tied to performance, excellent art market professionals are increasingly opting to go the art fund route. This enables them to share in pay arrangements that can surpass those of more conventional positions.

Now that you know how investment funds work, you can decide whether such an investment is right for you. Scores of investors do very well with such art funds, and as you can see, the number of art investment funds continues to increase.

Even better, you get all of the benefit of art as an investment, without the concerns of physically owning and caring for and exceptionally valuable work of art on your own. There are security concerns, maintenance concerns and insurance concerns with which you must contend.  This approach gets you the return on the investment, while sparing you the efforts associated with owning rare and valuable works of art.

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You might think that risk-rated funds are the only solution for the core hold of your portfolio. After all, it is what you would normally hear from others. But, in reality, the secret to ensuring their assets match the ones you aim for is to supplement them with so-called “satellite” funds and shares.

Fortunately, it is not too late to turn things around. Here are some tips on how to customize your portfolio to suit your goals. Be sure to keep them in mind from now on!

#1. Cheap Is Not Necessarily Cheerful

Believe it or not, many tend to focus more on fund charges, which seem to be the trend since time immemorial. But what you may not know is that most, if not all, are not necessary. Some might have a charge for the platform or advice, especially if you are taking it. More importantly, there is always a charge for the investment funds.

Remember that a cheap fund does not necessarily mean it fits your purpose. The same thing can be said for an expensive fund – it does not convey superiority. Your best course of action is to look out for performance-related charges, as well as those platform costs (i.e. when trying to move money around).

#2. Always Identify Your Goals

It holds true that your appetite for risk is – and always will be – a significant consideration. But do not forget that there are other contributing factors involved. This is the point where you need to ask yourself: “What are my investment goals?” Do you require a short- or long-term objective? Or perhaps you are in need of a certain amount just to guarantee an annual growth for your investment goal in the stock market?

These questions, while all may not necessarily apply to your current situation, can help you gain concrete knowledge about your stand. Even more so, it will help you realize the fact that there is more importance emphasis when it comes to risk analysis. The latter, in particular, conveys the message that your fund may either underperform or take too much risk.

#3. Keep Everything in One Place

Do you know what a balanced portfolio should be? Well, it is the type that holds bonds, cash, and even shares. As soon as you achieve a solid core portfolio, expect a great number of adventurous investors to add riskier holdings in order to diversify. You may find it difficult to acquire this type of ideas, but as long as you are willing to think outside the box, you will be introduced to more tantalizing investments.

Being a professional means utilizing a wide range of left-of-field investments – a crucial element in achieving diversification. This includes, but not limited to, private equity, currencies, commodities, and student housing.

#4. Remember To Consider All Assets

A lot of investors these days tend to consider their investment portfolio as something that is merely their shares and/or composite funds. Unfortunately, this is a worn-down idea that needs an overhaul. Why exactly? That is because there are other factors involved, and they may refer to cash accounts and properties. All of them, regardless of size and shape, are to be accounted as assets as well.

Let’s say you own multiple properties. This is where you want to be extremely wary of purchasing a fund, particularly the type that comes with property exposure. Likewise, if you hold a lot of cash, it is imperative that you find a liquid fund which is totally invested. Otherwise, there is a possibility that you will be hit by extremely low-interest rates.

#5. Regularly Review Your Holdings

This is definitely a no-brainer. It is even something that you should always consider. Keep in mind that risk-rated funds – no matter how you perceive them – are a one-stop-shop for life. Your goals will have the potential to change as time passes by. As such, you must ensure to review all of them as you would with investments. A general rule of thumb is to look at your portfolio at least once a year, though doing it twice has become a more acceptable narrative.

Sure, you may not find the need to purchase or sell funds, say, as often as twice or thrice a year. But, in one way or another, you will chance upon certain life stages that will force you to consider tweaking your portfolio. It could be about purchasing a property or simply becoming a parent.

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