Picasso Lures Hedge-Fund-Type Investors to Art Market

Date: Thursday, January 26, 2006
Author: Bloomberg.com

Jan. 26 (Bloomberg) -- In September 2004, Philip Hoffman did something unusual: He bought a painting he actually likes. It was a work by Ed Ruscha, a pop art icon whose paintings hang in the National Gallery in Washington. Hoffman says he loathes some of the art he buys. In fact, he says he barely glances at paintings that have cost millions of dollars to acquire. Hoffman, 44, is a new breed of investor in the $5 trillion art market. From a townhouse near Hyde Park in London, he manages an investment fund that buys and sells paintings rather than stocks or bonds. Since 2004, a dozen or so similar funds have tried to lure investors as the price of art has soared. So far, Hoffman's is the only one that's raised enough money to start investing. Melding art and finance, art funds aim to trade Picassos and Rembrandts the way hedge funds trade U.S. Treasuries or gold --- and collect hedge-fund-like fees in the process. Hoffman's Fine Art Fund, for example, charges an annual management fee equal to 2 percent of its assets and takes a 20 percent cut of profits once the fund clears a minimum hurdle. Hoffman, a former finance director at London-based auction house Christie's International Plc, says his fund isn't about beauty, truth and passion; it's about making money. ``We take a completely cold view,'' Hoffman says. Hoffman's investors need cool heads, too. He requires a minimum investment of $250,000, and investors can't withdraw their money for three years. Hush-Hush Hoffman refuses to say how big his fund is, discuss his clients or name any specific works of art he has purchased. Neither will he disclose the prices at which he has bought or sold art. Hoffman says doing so would tip his hand in a market where prices of works by artists such as Andy Warhol have soared more than 600 percent during the past decade. Trading art like T-bills won't be easy. Art is hard to value and expensive to buy and sell. Experts don't even agree about how it stacks up as an investment. Jianping Mei and Michael Moses, professors of economics at New York University, have devised an index to measure the performance of art --- sort of a Standard & Poor's 500 Index for the Matisse and Rothko crowd. Their index returned 14.5 percent in 2005. David Kusin, who runs Dallas-based Kusin & Co., an art economics firm, says that return is inflated because Mei and Moses have excluded transaction costs and works that fail to sell at auction. Hot Artists For art funds, the biggest challenge of all may be that there's no way of knowing whether today's hot artists will be popular years from now, says Jeremy Eckstein, a London-based art consultant. These days, many collectors are spurning 19th-century impressionists such as Claude Monet and Pierre Auguste Renoir, who were all the rage during the 1970s and 1980s, and opting instead for paintings by contemporary artists such as Elizabeth Peyton and Richard Prince. ``You can't commodify art like corn or soybeans,'' says Andrew Fabricant, an art dealer at the Richard Gray Gallery in New York, whose inventory includes works by Willem de Kooning, Jasper Johns and Jackson Pollock. ``The differences in quality, even in works by the same artist, stymies any plot or graph you can come up with.'' Monets and Renoirs Art funds -- and their investors -- are taking a big gamble, Fabricant says. The market hasn't been this heady since 1990, when Ryoei Saito, then chairman of Fuji, Japan-based Daishowa Paper Manufacturing Co., set a world record by paying $82.5 million for a single painting, ``Portrait of Dr. Gachet'' by Vincent van Gogh. The next year, as Japan's economy sputtered, art prices began to tumble. Prices of Monets and Renoirs, for example, have slid more than 35 percent during the past 15 years. The art world suffered another shock in 2001, when Alfred Taubman, former chairman of Sotheby's Holdings Inc., was convicted of fixing prices with Christie's. Since then, art prices have spiraled higher. At a Sotheby's auction in New York in 2004, an anonymous buyer purchased ``Boy With a Pipe'' by Pablo Picasso for $104.2 million, eclipsing the 1990 van Gogh record. This past November, at Christie's in New York, actor Steve Martin and model Stephanie Seymour were among the throng of collectors vying for the works of Mark Rothko, Roy Lichtenstein and other contemporary artists. Record Prices Bidding by phone, an anonymous buyer snagged Rothko's ``Homage to Matisse'' for $22.4 million. Robert Mnuchin, a former partner at Goldman, Sachs & Co., bought Lichtenstein's iconic ``In the Car'' for $16.3 million. In all, the auction raked in $157.4 million -- a record for a sale of postwar and contemporary art. The sale also set record prices for works by 16 artists, including Prince, Ruscha and Warhol. ``The art market is frothy, and prices won't go up forever,'' Fabricant says. Marc Porter, the president of Christie's Americas, says the current art boom, particularly in contemporary paintings, hasn't yet reached the speculative frenzy that gripped the market in the late 1980s. Talk of new ways to invest in art usually heats up when the market does, says Mary Hoeveler, president of New York-based Citigroup Private Bank Art Advisory Service, a Citigroup Inc. unit that buys art for wealthy clients. She says she's not sure art funds will succeed. Reluctant Investors ``It is difficult to buy and sell art institutionally and be quick on your feet,'' Hoeveler says. Graham Arader knows from experience that many experienced collectors are reluctant to invest in art funds. Arader is a rare books and prints dealer in New York, and he's been struggling to raise $200 million for an art fund that would specialize in American paintings. Many art collectors aren't interested, he says. ``The idea is still very foreign to them,'' he says. One big investor, Amsterdam-based ABN Amro Holding NV, has given up on art funds, at least for now. ABN Amro, the largest bank in the Netherlands, hired Seymour Management, a London-based art advisory firm, to find viable art funds. Seymour Management's Managing Director Spencer Ewen says he turned up five, including: the China Fund, run by Julian Thompson, a former chairman of Sotheby's International and a specialist in Chinese porcelain, which focuses on Chinese art; Fernwood Art Investments, founded by Bruce Taub, formerly senior director of the international private client group at Merrill Lynch & Co.; and Hoffman's Fine Art Fund. British Rail Fund Of those funds, only Hoffman's has actually started buying and selling art. ABN Amro pulled the plug on its art project in May 2005. Spokesman Mark Bennewith declined to comment. Art fund proponents are unbowed. Thompson points to the art market success of the British Rail Pension Fund. British Rail began investing in art in 1974 and eventually plowed 40 million pounds ($70 million), or 2.9 percent of its holdings, into the market. The fund sold its art investments during the 1980s and 1990s, racking up an annual, compound return of 11.3 percent. Thompson was in charge of the fund's Asian art holdings. These days, the rich have begun buying art to diversify their investments, says Brook Hazelton, managing director at New York-based auction house Phillips de Pury & Co. ``There is a fundamental change in the way people approach art,'' Hazelton says. ``People are viewing art more as an asset category.'' `The Next Alternative' Auctioneers, art dealers and Wall Street bankers are all vying for a piece of the action. Christopher Wright, formerly head of private equity at Dresdner Kleinwort Capital, sits on the board of Hoffman's Fine Art Fund management company. Hebrew University finance professor Dan Galai, co-inventor of an index that uses options to measure the volatility of the S&P 500, has joined entrepreneur Moti Shniberg to set up MutualArt Inc., a New York-based financial-services company focusing on art. Raymond McGuire, global co-head of investment banking at Citigroup, sits on the advisory board of that company. Randall Willette, a former corporate finance director at Citigroup, is now the managing director of Fine Art Wealth Management Ltd., a London-based art-investment consulting firm. He says rich investors who've invested in hedge funds and real estate have started to turn to art. ``High-net-worth individuals are looking for the next alternative investment strategy,'' Willette says. ``Art funds will go a long way towards making art a mainstream asset class.'' So far, the going has been slow. Mayfair Townhouse Thompson says he's still trying to raise the $25 million he has targeted to launch his London-based China Fund. Prices of Chinese art have been rising 10 percent to 15 percent annually in recent years, and he sees that continuing as wealthy Chinese collectors try to repatriate important pieces. Executives at Fernwood, based in Boston and New York, declined to comment for this story, saying they were still in the midst of raising money for their funds. Sitting in his London townhouse headquarters, in the tony Mayfair section of the city, Hoffman makes no pretenses about being an art expert. ``I am really a moneyman,'' says Hoffman, who's wearing Chanel eyeglasses, a dark suit and bright red socks. The narrow, four-story townhouse serves as the family office of the late James Hanson, co-founder of building materials company Hanson Plc. Hanson's son, Robert, was one of Hoffman's early backers. Several landscape paintings --- ``mediocre'' ones, according to Hoffman --- adorn the walls. Christie's Crash Course ``In the last 24 hours, we have committed to purchase $4 million of art,'' Hoffman says, declining to elaborate. He says he's also sold some paintings. Hoffman, who grew up in Cambridge, England, fell into the world of art by chance. He graduated from the University of York in 1982 with a degree in economics, and later became a chartered accountant at KPMG International in London. A few years later, when he was 27, he heard that Christie's was looking for a finance director. Until then, the only things he'd ever collected were comic books. At Christie's, Hoffman got a crash course in art, learning everything from how to manage the finances of an auction house to techniques used to spot fakes. At 33, he became the youngest-ever member of Christie's management board. Hoffman left Christie's and founded the Fine Art Fund in 2000, with the backing of the Hanson family. Latin America, Middle East ``The idea was to capitalize on the dot-com money that was driving up art prices at the time,'' Robert Hanson, 45, says. As the Nasdaq bubble burst, Hoffman found a new partner in David Abramson, an art collector who's now nonexecutive chairman of the fund's management company. Dresdner Kleinwort Capital, then a unit of Frankfurt-based Dresdner Bank AG, helped set up Hoffman's fund. Dresdner never became an investor and has since severed its relationship with the fund. Hoffman initially set out to raise $100 million to $350 million, according to a brochure for the Fine Art Fund. He spent every other week traveling in search of investors -- across Europe, to the U.S., to Latin America, to the Middle East. At one point, he pitched his fund to more than a dozen private U.S. college endowments. Not one of them bit, Hoffman says. ``I wasn't sure he would make it,'' Hanson says. Today, Hoffman says he has investors from more than 10 countries, including Chile, Portugal, Spain, the U.K. and the U.S. The fund's largest investor, whom he won't name, has put in almost $10 million, he says. Reeling in Investors Hoffman has started to get nibbles from pension funds and institutions for a second fund that he began putting together in January. He says he hopes his initial fund will return 10 percent to 15 percent annually over its remaining eight-year life. Hoffman typically spends his days trying to reel in investors, signing off on art purchases, hedging against swings in exchange rates and consulting with his in-house art expert, Morgan Long. Long, who has a master's degree in art history from London's Courtauld Institute of Art, checks the provenance of the art Hoffman buys and makes sure the fund avoids forgeries. To find investments, Hoffman also employs five art dealers. Before Hoffman acts on their recommendations, three independent advisers verify the art's quality, history and price. Buying at auction is expensive: Auction houses typically charge a buyer's premium of 20 percent on the first $200,000 and an additional 12 percent thereafter, so Hoffman's buyers try to negotiate private sales whenever possible. 7.5 Percent Commissions ``They know which blue-chip painting to buy and when to sell it,'' says Hoffman, who spends his spare time playing lawn tennis and entertaining his buyers at his house outside St. Tropez, on the French Riviera. ``They know which client needs money urgently and is ready to sell.'' If everything goes smoothly, Hoffman pays his buyers commissions of as much as 7.5 percent of the purchase price. He stores the art in a Geneva warehouse and sometimes lends pieces to museums. For an annual fee of 1.25 percent of the art's insured value, investors in the Fine Art Fund can hang one of the paintings in their home. Hoffman and his buyers must be able to move fast. In July 2004, one of the buyers noticed that an Old Master painting had been erroneously catalogued by the auction house selling it, Hoffman says. He pounced and bought the painting for $180,000. He says he has offered to sell the work privately for $300,000. Between March 2004 and June 2005, the fund returned an average 54 percent on sales, Hoffman says. `The Inside Scoop' Peter Stephens, chairman of Seymour Management, says using dealers is fraught with potential conflicts of interest. ``How can you be confident that art dealers, no matter how prestigious, are giving you the best deal?'' he says. Some dealers might be reluctant to recommend a painting to an art fund when they could buy and sell it themselves more profitably, says Robin Duthy, founder of Art Market Research, a London-based firm that tracks the art market. What's more, even the best art specialists don't always have solid information about the market, says Thea Westreich, a New York art adviser for 25 years. ``Everyone thinks they have the inside scoop,'' Westreich says. At MutualArt, Galai and Shniberg want to make art funds pay for artists. The pair, along with David Ross, a former director of New York's Whitney Museum of American Art and the San Francisco Museum of Modern Art, in 2004 set up the Artist Pension Trust. Pension Trusts Two-hundred-and-fifty selected artists contribute works to the trust. When the trust sells the pieces, the artists get a share of the proceeds from their own work and that of the entire pool. Shniberg came up with the idea after noticing that a friend who is a successful artist had no retirement plan. ``It is based on the principle of risk management,'' Galai says. ``If just 1 percent of the artists in the pool become superstars whose work sells for $500,000 or more, then even the less successful artists will have $100,000 to $200,000 in their accounts.'' So far, Shniberg has raised $7 million and set up pension trusts in Berlin, London, Los Angeles and New York. This year, he plans to open trusts for artists in Beijing, Mexico City, Mumbai and Singapore. MutualArt also wants to set up an art dealers' fund, in which dealers would co-invest in contemporary art with other investors, on a 50-50 basis. Under Shniberg's model, any profits would go to the investors first and the dealers second. Sharing Risks In the event of a loss, the opposite would happen. If an art work depreciated by 50 percent, for example, the investors would get all of their money back and dealers would take the loss. ``We minimize investor costs by sharing the risks with the dealers,'' Galai says. One of the biggest challenges for art funds is that they take the fun out of buying art. Steven Robinson, a Florida judge, has been collecting art for 35 years. He heard Hoffman speak at a Miami art fair in December and says he came away unimpressed. ``With art, you are not getting anything quantifiable,'' Robinson says. ``I guess I'm too much of a romantic.'' Another way to invest in art is to team up with like-minded collectors, says Seymour's Ewen, who has formed an informal club focusing on modern British art. Such groups have succeeded before. In the 1970s, Belgian banker Baron Leon Lambert formed an art club that invested in works by de Kooning and Alberto Giacometti before those artists became popular. In today's heady art market, art funds and their investors will have to tread carefully, Citigroup's Hoeveler says. ``All these funds believe they have built a better mousetrap,'' she says. If the art boom goes bust, investors will be the ones who get caught. To contact the reporter on this story: Deepak Gopinath in New York at dgopinath@bloomberg.net