Art as a Financial Asset Class

This is one of the most depressing abstracts I've seen in a while:

This paper analyzes the performance and risk-return characteristics of three major emerging art markets: Russia, China, and India... The Russian art market exhibits positive correlations with most common financial assets and a positive market beta, whereas the Chinese art market demonstrates a negative correlation overall and a negative market beta... Portfolio optimization under a power utility framework suggests limited diversification potential, but with a downside beta of 0.43, investing in Chinese art offers hedging potential during financial market downswings.

The paper itself is a little weird. It starts off with this bald and unfootnoted assertion:

Many investors in grim economic days search for alternative investment opportunities to shield themselves from declining stock markets. Not surprisingly, many of those investors turn to the art market.

It then disappears down all manner of methodological and CAPM rabbit holes, occasionally lapsing back into English to say things like this:

On the basis of these empirical findings, we conclude that the emerging art markets of Russia, China, and India provide interesting investment opportunities for the purpose of optimal portfolio allocation.

Finally, however, the paper ends on this not:

We conclude that investing in art is not an effective, purely financial investment. Artwork, unlike assets such as stocks, bonds, real estate, and certain investment funds, should be kept for the enjoyment of its aesthetic returns as well.

This of course gets it exactly backwards. Art isn't a financial asset class with added aesthetic returns; it's an aesthetic asset class (a bit like music, say) with added financial value.

If you have a significant art collection, which represents a serious chunk of your net worth, then it makes sense to bear that asset in mind when making your financial asset-allocation decisions. But it never makes financial sense to buy art, even if you enjoy it. And if someone from VU University Amsterdam comes along and tries to persuade you otherwise, ignore them. As a general rule, art should only be bought if you're happy mentally marking it to $0 as soon as it hits your wall: work on the general assumption that any possible financial upside is cancelled out by the certain financial downside of insurance costs, added security costs, and the like.

That's why I would, until last week, have thought that it made perfect sense for the Brandeis endowment to carry all art on its books at $1: it's just not right to think of donated artworks as a financial asset, so if they have to be counted as part of the endowment, they should arrive there at $1 and stay at $1.

The problem of course is that at any point the trustees, as we have seen, can decide that the art can be sold after all, and at that point the $1 nominal cost becomes an extremely attractive way of manufacturing capital gains. Of course, no one's stopping to think that most of the art would never have been donated in the first place if the donors had any inkling that it would ever be used for this kind of purpose.

(HT: Abnormal Returns)