Investing in art as an alternative asset class

I find investing in art as an alternative asset class very intriguing. Fine art and other collectibles owned by ultra-high net-worth individuals globally account for just 2% of total portfolio allocations. We've collected some materials for you to learn more about the subject.

Just 1% of all artists generate more than half of all artwork sold globally, according to the TEFAF Art Market Report. There is no magic formula to identify which artists will be the most sought-after or successful, and no guarantee of a positive return on investment.

Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that?paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns.?The selection-corrected average annual index return is 6.5%, down from 10% for traditional uncorrected repeat sales regressions.?From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for.

One of the most followed art indices is the?Sotheby's Mei Moses Index, which is based on?approximately 60,000 repeat sales from 1810-present. The index?uses the purchase prices of the same painting at two distinct moments in time (i.e., repeat-sales) to measure the change in the value of unique works of art.

The graph below shows the index for the art market starting from 1950 till 2021. For this period the?compound annual average growth rate is 8.5%.

Art is regarded as a "non-correlated asset", which means that if the stock market crashes the art market doesn't necessarily follow. There's one problem with this logic, in a recession art is one of the last things people will use their liquidity on and will do so only to bargain hunt. No transactions at lower prices technically means the market isn't going down. But that's just semantics, when liquidity dries up price is set by the marginal buyer.?If you buy art as an investment be sure you like what you buy since you may end up owning it for some time.