The Art Trading Fund: Still Doomed to Fail

The Art Trading Fund, which seemed like a bad idea when we first encountered it last month, is going to officially launch on July 1, reports Kit Roane. Which seems like another bad idea to me: who launches anything on a Sunday?

Roane, however, seems willing to give it the benefit of the doubt:

Besides art, hedge funds tracking the market for vintage wine and rare violins have cropped up recently, while Wall Street traders have been making sport of arbitrage on everything from fine watches to duck decoys.

"Tracking the market," of course, is basically just another word for "buying the assets and then heading to the beach," or, even more simply, "collecting". There are people who collect fine watches or duck decoys, just as there are people who collect wine or violins. That's easy. The Art Trading Fund, by contrast, has set itself a much higher hurdle: to trade in and out of art while somehow shorting the market as a whole, with the intention of making money not only when the market goes up but also when the market goes down.

In that sense, "returns" on the Mei-Moses Fine Art Index are irrelevant: investors in this fund will expect to make money no matter what happens to Mei-Moses. And in a much bigger sense, too, Mei-Moses returns are irrelevant: they can't be monetized. The index might have gone up by 18% last year, but there's no art-tracking instrument you could have bought at 100 on January 1 which you could have sold for 118 on December 31.

And if you bought a painting at auction for a hammer price of $100,000 on January 1 and then sold it for a hammer price of $118,000 on December 31, you would end up losing a packet. (If you paid a 12% buyer's fee and a 10% seller's fee, then that would add up to about $24,000 right there.)

Art, contra NYU's Mitchell Moss, is not an annuity: it pays no annual dividend and in fact has a negative carry, thanks to insurance and storage costs. And investors in the Art Trading Fund will be even worse off than collectors, as Roane explains:

The fund will carry hefty fees—a 2 percent annual management fee and a 20 percent charge on investment performance—and rapidly buying and selling the art will drive up transaction costs, since auction houses and dealers already heavily lard up the process with fees of their own.

Roane even disinters the ill-starred Fernwood Art Investments, the last attempt to trade in and out of art. He quotes one investor as blaming Fernwood's demise on "garden variety human frailty," which is a problem much larger than Fernwood. The fact is that the art market, more than any other market, involves the tender stroking and exploitation of human frailties: without human frailty, indeed, there would be no art at all.

The best art dealers make many millions of dollars by creating value: they start with an intrinsically worthless layer of petrochemicals on canvas and then massage the egos and vanities of collectors, stoking demand and raising prices. The Art Trading Fund, on the other hand, will do none of that, believing instead that it can jump scientifically in and out of geographical arbitrages and the like.

It won't work. Many dealers will make a lot of money by selling to and buying from the Art Trading Fund. But the fund itself, in the final analysis, is just another punter to be exploited by art-world insiders. At $40 million, it doesn't even count as particularly large, by the standards of today's collectors who will happily drop twice that on a single canvas. Still, with a management fee of 2%, its principals stand to make at least $800,000 a year, all while soaking up the glamor and flattery of the art world and having their egos massaged by art-world types. It's not a bad way to make a decent living – until the investors get fed up and pull their money out, of course.