Book Review : Fine Art and High Finance: Expert Advice on the Economics of Ownership

Fine Art and High Finance: Expert Advice on the Economics of Ownership
Edited by Clare McAndrew
Bloomberg Press, $39.95, 336 pages

The art boom of 2004-07 saw such staggering growth, particularly in contemporary art, that it is hardly surprising that art is increasingly being commoditised, bundled into funds and flagged up as an alternative asset class.
But while most people can recognise a Warhol or a Picasso at 10 paces, they have far less knowledge of the complex issues inherent in trading something that is almost always heterogeneous, in an opaque and unregulated market.

The editor of this book, Clare McAndrew, has a PhD in economics from Trinity College Dublin and runs a consultancy focused on the art economy. Her book The Art Economy, published in 2007, was an investor’s guide to the art market. This book updates and expands the topics covered in that volume, using a team of expert contributors, from art law specialists Pierre Valentin and the Danziger brothers to insurer Jill Arnold.

After a brief gallop through the history of the modern art market, McAndrew outlines its current structure and main players before getting to grips with its economics. She makes the fundamental point that “one of the most important economic features of the market is that it is essentially supply-driven ... increased demand ... cannot necessarily increase supply ... and instead elevates prices”.

But the art market is also difficult to quantify, and even its size, as several contributors point out, is only an estimate: $65bn in 2008, according to McAndrew. Moreover, how do you assess the price of a painting when four Picasso portraits of Dora Maar, all from the 1940s and of comparable size, can sell for between $4.5m and $85m within a three-year period?
There have been many attempts to establish indices for art, none of them completely successful. As Dr Roman Kräussl of Amsterdam’s VU University points out: “All price indices for the art market suffer bias because of inherent problems in the available data.” The only available prices are those made at auction, which eliminates about 50 per cent of transactions, those made through dealers. Having summarised publications from 1974 to 2008, Kräussl concludes that “studies on the returns on art investment have produced very mixed results”.

In the light of this, it might seem surprising that so many art funds have been started. The enormous profits that could be made until last year were an obvious inducement – particularly in India, which, according to wealth management specialist Randall Willett, represented the majority of the 50-odd funds that were “active” in 2009. Willett outlines the various fund models, while McAndrew contributes a case study of the only art hedge fund, based in the UK. Chapters on insurance, government regulation, art banking, risk, taxation, conservation and the illegal art trade complete the book.

There are some inconsistencies in coverage: for example, taxation in the UK and the US are detailed but the chapter on the illegal art trade covers only the US, leaving out the world’s second-largest centre for art trading. Art-related litigation is growing, and UK and US legislation differ in a number of aspects affecting the art market.

What the book cannot do (and nor does it try to) is predict how the art market will evolve, as it is still in the throes of readjustment in the wake of the recent financial crisis. That crisis had a major impact, particularly in the area that had seen the biggest gains: contemporary art, where some artists have seen their value fall by as much as 50 per cent.

The decision to “invest” in art is complex but this book provides a wealth of information for those who are thinking of putting their money – as headline writers love to say – into Monet.

Review by Georgina Adam

Published: January 11 2010 03:47 , FT.com