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Art is a bubble: Here's how to short it

Aside from being a successful investor, Jim Chanos is also a big art collector. The founder of hedge fund Kynikos Associates adorns his walls with Gerhard Richter and other top contemporary artists and sits on the board of the Tate Americas Foundation.

But right now, Chanos sees a speculative bubble forming in the art market. And he said the best way to hedge is to short the stock of Sotheby's.

"Anybody who buys art should be looking to hedge it right now," he said Thursday on CNBC's "Squawk Box." "The contemporary market has gone bonkers."

Art has become especially popular in the current wealth boom, as the global rich turn to art as a safer, less volatile store of wealth. Art has also become a refuge for the rich in China and Russia looking to stash their fortunes offshore.

Prices for everything from $142 million Francis Bacon paintings to $58 million Jeff Koons balloon dogs are hitting all-time records.

Read MoreArt is the worst performing collectible

"Art is a socially acceptable form of conspicuous consumption," Chanos said.

Chanos said that the current art bubble is different from previous art booms because the big price gains are largely in living artists—so their paintings will keep coming onto the market.

A man looking at the painting 'View of Avignon from the right bank of the Rhone' by 18th century French artist Claude-Joseph Vernet at Sotheby's auction house in London.
Andrew Cowie | AFP | Getty Images
A man looking at the painting 'View of Avignon from the right bank of the Rhone' by 18th century French artist Claude-Joseph Vernet at Sotheby's auction house in London.

"In the '80s, the Japanese were buying Impressionists. Then it was modern art in the 1990s. But in the last 10 years, it's been contemporary. As I like to point out, these people are still alive producing art," he said.

So how do you hedge the art market? Chanos said that shorting the stock of Sotheby's is the closest financial proxy to shorting the contemporary art market.

Read MoreHere's Jim Chanos' 'ultimate' bubble indicator

"For people who don't want to sell their art, the best thing is to short the stock of Sotheby's," he said.

Chanos showed a chart showing how Sotheby's stock price always peaks during speculative bubbles. It spiked during the leveraged buyout boom in the late 1980s, then during the dot-com bubble in 1999 and then subprime-housing bubble in 2007. He labels the current bubble as the "central banks" bubble, which has lifted Sotheby's stock to above $44.

Chanos declined to say whether he is short Sotheby's. And he said he's not involved with the proxy battle being waged against Sotheby's by hedge funder Dan Loeb, who is calling for new management and strategy at the company.

"Dan has his own agenda," Chanos said.

But Chanos said that fellow hedge funder/art collector Steve Cohen once bought Sotheby's stock at $6 a share.

"I'd rather be buying it at $6 than $46," he said.

Sotheby's declined comment on Chanos' remarks. Its shares were trading at just under $44 at midday Thursday. (Click here for the latest price.)

—By CNBC's Robert Frank.

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