As Real Estate Goes, So Goes Art?

If you thought this real estate market was rocky, just wait for what's in store for your Picassos and Rothkos. The art market, which hasn't had a serious setback since 1990, is inevitably going to experience volatility when demand starts to fall. At least, that's what the legendary hedge fund manager and art collector Michael Steinhardt predicts.

Steinhardt tells Bloomberg News that the decline in painting values will be similar to declines in stocks and real estate. Risk exposure in the art market is even greater because of the limited information available on dealers' prices and the industry's lack of regulation. "We've seen some extraordinary rises in prices, but we haven't seen the downside," he says. "There could be great volatility when the market declines."

Just last week, a painting by Mark Rothko sold at auction for $73 million, more than any other contemporary painting and nearly twice its $40 million estimated price. At the same auction, a Francis Bacon piece sold for $53 million, even though its worth was estimated at $30 million.

Steinhardt, a retired hedge fund manager who made phenomenal returns for his clients (only three down years during a 28-year stretch), also knows a thing or two about art. He owns works by Jackson Pollock, Andy Warhol, Pablo Picasso and Paul Klee, among others. He says he has spent $200 million on art in the past 20 years.

So if Steinhardt thinks the market is nearing its top, is he furiously unloading his goods? Not exactly. "I'm constrained," he says. "My wife won't let me."

by Megan Barnett