Speculating in art is not, of course, new. In one of the most intriguing investment schemes in recent history, Japanese industrialist Ryoei Saito purchased van Gogh’s “Portrait of Dr. Gachet” in 1990 for the then-record price of $82.5 million. Immediately after taking possession of the painting, he secured it in a climate-controlled vault where it remained for seven years. By 1993, Saito’s financial empire had fallen apart. Since his death in 1996, the location and ownership of the painting have remained a mystery.
This investment strategy treats art like any other commodity purchased for speculative purposes. The investment game changes significantly when art is regarded as a financial asset, rather than as a consumer good. Speculators in the art market have recently established hedge funds and private equity funds for the purchase and sale of art. These funds extend the principles of finance capitalism to art. Take the example of mortgages. As we have seen, since the early 1980s, mortgages have been securitized as collateralized mortgage obligations (CMOs) so that they could be bought and resold in secondary and tertiary markets. While the value of these derivatives is supposed to be determined by the value of the underlying asset (the price of the real estate), in a rising market the value of the derivative increases relative to the collateral on which it is based.
With the growing volatility of financial markets, investors attempt to hedge their bets by trading derivatives using different variations of portfolio theory. When mortgages are bundled and tranched, the evaluation of risk has nothing to do with the value of a particular asset but is calculated using mathematical formulae to determine the statistical probability of defaults of the underlying mortgages. With this practice, the derivative drifts farther and farther from its underlying asset until the virtual and the real seem to be completely decoupled.
Some enterprising investors are applying this model to the art market. London financier Philip Hoffman, for example, has established Fine Art Management Services Ltd., which speculates in art rather than stocks. Bloomberg’s Deepak Gopinath explains Hoffman’s strategy: “Melding art and finance, art funds aim to trade Picassos and Rembrandts the way hedge funds trade U.S. Treasuries or gold — and collect hedge-fund-like fees in the process. Hoffman’s Fine Art Fund, for example, charges an annual management fee equal to 2 percent of its assets and takes a 20 percent cut of profits once the fund clears a minimum hurdle.”
This strategy securitizes works of art in the same way that CMOs securitize mortgages. Just as mortgages are bundled and sold as bonds, so works of art are bundled and sold as shares of a hedge fund. In other words, rather than owning an individual work of art, or several works of art, an investor owns an undivided interest in a group of art works. In these schemes, what is important is not the real value of the company, commodity or artwork; what matters is the statistical probability of its price performance within a specified time frame relative to other portfolio holdings. Furthermore, insofar as investors hedge bets by using portfolio theory, the value of any particular work of art is determined by its risk quotient relative to other works of art held by the fund.
Like investors in CMOs, who know nothing about the actual real-estate holdings whose mortgages they own, investors in art hedge and private-equity funds know nothing about the actual artworks in which they are investing. Investors in art funds could conceivably sell their shares, thereby creating secondary and tertiary markets. As trading accelerates, derivatives (fund shares) and underlying assets (works of art) are once again decoupled, creating a quasi-autonomous sphere of circulating signs in which value constantly fluctuates.
This financialization of art is a genuinely new phenomenon that even Andy Warhol could not have predicted. The most prominent representative of the financialization of art is Damien Hirst, who is notable for his creation of works of art specifically designed for new financial markets. A newspaper editorial in 2007 observed that Hirst “has gone from being an artist to being what you might call the manager of the hedge fund of Damien Hirst’s art.” The most ostentatious example of his strategy was the production and marketing of his $100 million diamond-studded skull ironically titled “For the Love of God.”
The financial machinations surrounding the sale of this work were as complex and mysterious as a high-stakes private- equity deal. One year later, Hirst mounted his own sale at Sotheby’s in London at the precise moment that global financial markets were collapsing. Though the sale was an enormous financial success, it is clear that this unlikely event marked the end of a trajectory that had been unfolding since the end of World War II.