But as the prices of major artworks have risen, niche money managers are developing art funds with the hope that their underlying works of art — and shares — will appreciate in value. What makes art experts nervous is that these funds bear some similarities to asset-backed securities and derivatives, opaque investments that got a bad name in the financial crisis.
In the middle of this struggle are proponents, like the art research firm Skate’s, that are trying to legitimize the emerging movement by making the market more transparent and providing guidance to investors new to the art world.
“Transparency and valuation of the pooled art assets are the two key issues facing art securitization,” said Cristina del Rivero, a Manhattan securities lawyer who follows the nascent market through her blog, Art Meets Law.
With stocks and bond still volatile, rich overseas investors are rushing to tangible assets like art. Last year, auctions set records. Bidders paid $106.5 million for a Picasso, $104.3 million for a Giacometti, $89.5 million for a Qianlong Chinese vase and $11.5 million for a rare Audubon book.
Financial firms are looking to capitalize on that interest. By investing through funds, wealthy individuals can own art without paying the large fees and heavy taxes usually associated with full ownership. Some money managers claim returns can run as high 20 percent.
The field, with $300 million in assets, is small but growing. In Paris, the Art Exchange has plans to publicly list at least six pieces, including one by Sol LeWitt, and sell shares to investors. The Russian asset management firm Leader — controlled by close associates of Vladimir V. Putin’s — created two art-related investments. Last summer, Russia passed regulations to allow art to be turned into securities, the second country to do so after India. Noah Wealth Management and the Terry Art Fund are starting portfolios in China.
The idea behind many art funds is relatively simple: A few big investors put up money to help a money manager buy paintings. Smaller investors buy ownership units, whose values are tied to the underlying art. For the privilege, they pay fees of around 5 percent of the assets and 20 percent of the profits.
It is a private market. When investors want to cash out, they have to trade the stakes — just as early owners of Facebook have sold some shares on secondary exchanges.
A handful of companies are trying to bring transparency to the historically shadowy, unregulated arena. Skate’s — founded by a Russian investment banker and entrepreneur, Sergey Skaterschikov — has set out to be “the Standard & Poor’s of art,” said its chairman, Michael Moriarty. The firm keeps a database of more than 5,000 of the world’s most valuable art pieces, and its nine-person staff churns out industry reports on paintings, including the background, investment risks and prices.
“We’re not first and foremost art people,” said Mr. Moriarty, a former lawyer for the Securities and Exchange Commission. “We’re business folks.”
Skate’s and others face hurdles as they help bring art funds to the wealthy. Among the obstacles: a graveyard full of previous efforts.
During the economic boom of 2005 to 2007, around 40 art funds raised $350 million to $450 million, according to Skate’s. But most disappeared after the financial crisis. Only the most established survived the shakeout, including the China Fund and the Fine Art Fund.
This time around, some experts worry that art funds — popular mainly in emerging markets like India, China and Russia — will attract the wrong element. Art funds, they say, have the potential to provide an easy vehicle for money laundering or hiding assets. One investor familiar with the Russian market said that the investments could appeal to a rising class of political oligarchs looking to keep money out of banks, where it can be seized should they run afoul of powerful friends.
“Corrupt government officials who have money are always looking for ways to keep it, and to keep it out of the banking system,” said William Browder, the founder of the hedge fund Hermitage Capital, whose crusade to expose corruption in Russia got him blacklisted from doing business there and brought death threats.
Even the biggest proponents of art funds concede the market has a long way to go. Michael Plummer, a former Christie’s and Sotheby’s executive who founded the art advisory firm ArtVest Partners, said he doubted that the art funds would catch on in the United States, which has a heavily regulated financial system.
“It’s not going to get critical mass in the post-Madoff era until a major bank or auction house puts its name behind it,” Mr. Plummer said.
But financial firms may find it hard to penetrate the art community, a critical step when buying and selling paintings. The president of the Art Dealers Association of America, Lucy Mitchell-Innes, said she would never allow a young artist to sell artwork to a pooled fund. Ms. Mitchell-Innes is the influential co-founder of the contemporary-art gallery Mitchell-Innes & Nash in New York’s Chelsea neighborhood and is close to the estate of Roy Lichtenstein.
“Generally we resist seeing art as another financial instrument,” Ms. Mitchell-Innes said. “None of us go into this market to trade commodities.”
Given such conflict, some art experts worry that investors looking for deals may get stuck with less-than-desirable works. Art dealers are more likely to keep bargains for themselves, said Harry Smith, chief executive of the appraisal firm Gurr Johns, and increase prices when art funds come calling — if they work with them at all.
“The headwinds art funds are facing is that the things they want to buy are expensive, and the things that are cheap they shouldn’t be buying,” Mr. Smith said.
Even so, companies continue their push to democratize the art world, expanding the class of investors who can say they own a piece of a Picasso. While their efforts are mainly aimed at the well-to-do with a high appetite for risk, the idea could soon reach others. A case in point: Skate’s recently offered an iPad application for art enthusiasts to research their favorite pieces.