A is for Assets e.g. Art?

It was announced today that savvy nvestors will from Friday be able to bet on the price of art, when Dublin's Intrade’s The Prediction Market begins trading futures contracts – which can be bought for as little as $30 – based on the art market prices (Mei Moses All Art Index). This is definitely shutting the stable door stuff. How much longer can the art bull market last before turning into the art bs market. But if there is a turning point coming up that makes derivatives a very interesting gamble for bulls and bears and even for collectors to seriously think about hedging their asset risk exposures. How will Intrade fare if it finds itself on one side of a lot of contracts in a one-way market. Spread-betting might be a safer form of derivative speculation in art, but for that to occur art prices would have to be quoted via buy-sell spreads on reputable (regulated) auction based exchanges. The art market is not yet that liquid or the underlying that homogeneous. There are at least a 100 global brand names however where such liquidity may be achievable? But, aggregating any artist's prices across all his works to calculate a single index per artist is a dark art, though one that at least half a dozen information services claim to have cracked and these may all be correlated within Mei Moses All Art Index? This is not about art; it is about money, and therefore I'd have to be convinced that price discovery could not be distorted by any one artist, dealer or collector?
Art has been traded as an investment for years even if never fully accepted by banks as investment grade against which any were prepared to lend money other than in special circumstances a few private banks. This always seemed silly to me as lending up to 25% of the auction house value of works by household name artists always seemed a safe bet to me. High risers other than the creme de la creme of the classics have been post-WWII American Expressionists, Pop Art (e.g. Warhol) and contemporary Pop Art that is often mistakenly called conceptual (e.g. Hirst who sold $178m this year of which $111m at auction) and Kitsch Art (e.g. Koons, $47m this year in sales) and Asian derivatives (e.g. Chinese). Both Hirst and Koons are reputedly $billionaires and they are not the only ones; so too are many collectors and more than a handful of gallerists. For years it has been possible to follow price trends, do charting and detect buy and sell signals for thousands of artists and millions of works of all kinds. The two artists with the biggest number of shows a year (over 350) are Beuys and Warhol (both 20 years dead). In Beuys' case (he being the most complex and multifaceted of all artists since Da Vinci) his total oeuvre is worth some $6bn+ but most of it by value lies in large public and a few private collections. The total capitalisation value of investment grade art is undoubtedly somewhere in the low $trillions with 90% locked up in museum collections. In Switzerland alone this decade some $5bn is being inherited by the next generation of collectors. There is money in them thar hills but only for the most intrepid; not many can become a Saatchi or a Count Panza or a Guggenheim, or a Mrs Richard Fuld.
The Intrade contracts start trading tomorrow. The move is said to be part of the trend, if a bit late in the day, for art to be viewed as an asset class with the development of art funds and art prices indices. Art funds have been around for a long time and some beauties are about to be unloaded in the auction rooms. It is a luxury and illiquid market however that is very sensitive to only the last prices for directly comparable items at the last auction. This is an asset class with a myriad of sub-classes - hard to commoditise and standardise. Like property it tends to be a long term play except in brief periods of market hype - usually when somewhere in the world there is a sudden production of nouveaux riches. When the dot-com bubble burst in 20021, the art market cried collectively as $billions in stock options that would have been converted and spent in the world's art markets suddenly were worthless. The fact is this can also happen to the art if you borrow heavily to buy it and can't afford to wait for years for prices to recover after a fall.
I've often advocated that artists and galleries whose revenues are volatile should issue bonds when they sell artworks offering to buy them back for a certain price in 10 years thereby doing two things, avoiding tax and putting some certainty into the market.
Chad (hanging) Rigetti, VP Bus. Dev. at Intrade, said: “The idea to create a price-transparent, liquid tradable art-based derivative occurred to me after reading about hedge fund billionaire Kenneth Griffin’s purchase of Jasper Johns’ ‘False Start’ for $80m in the fall of 2006 ... Creating a product that would bridge two circles – collectors and financiers – seemed obvious.” Haha - a ptltab deriv. might work since it is not cash market invested which would be beyond most people's wallets. He said investment strategies had become increasingly quantitative, and at the same time high-end art was being bought by people who had made money from such strategies. He thought these people would be natural candidates to buy art futures contracts. Of course, why not; Quantity over quality has got to work every time. “There has been an influx of financially savvy and technically savvy investors, which has led to the demand for this type of instrument,” he said. Yes, but where's the pleasure in hanging a derivative instrument on the wall that is not signed by the artist?