Contemporary Art as a Hedge Fund

You'll all be familiar with the Hans Christian Anderson's fairy tale about the Emperor's new clothes. Today I'm looking at the more recent fairy tale relating to contemporary art values - and I definitely see some parallels.

This is the second post on this theme this week (see Art values - gold standard or more derivative rubbish?) but the parallels just seemed to become more and more obvious as the week has worn on. Plus this has been a VERY unusual week.

An emperor who cares too much about clothes hires two swindlers who promise him the finest suit of clothes from the most beautiful cloth. This cloth, they tell him, is invisible to anyone who was either stupid or unfit for his position. The Emperor cannot see the (non-existent) cloth, but pretends that he can for fear of appearing stupid; his ministers do the same. When the swindlers report that the suit is finished, they dress him in mime. The Emperor then goes on a procession through the capital showing off his new "clothes". During the course of the procession, a small child cries out, "But he has nothing on!" The crowd realizes the child is telling the truth. The Emperor, however, holds his head high and continues the procession.
Wikipedia - The Emperor's New Clothes - Plot Summary

This week a lot of people have been counting the cost - in any number of different ways - of the biggest shockwave to the financial services sector since the Depression. As an ex-finance person, I've been reading financial pages and dropping my jaw all week. It's not finished yet but the lives of a lot of people will never be quite the same again.

However I'm not crying over the people who used to be billionaires now having rather less. Far from it!

I'm far more concerned that a number of very ordinary people with very ordinary salaries will be losing their jobs. A lot of small investors and people with pensions have taken some very major hits to their financial cushions. Some of those people are my friends - and I know what it feels like having personally been through a something similar experience last year (see Northern Rock - drawings from the front line)

In the financial services sector, the stresses and strains have come about essentially because of inappropriate risk ratings - and consequently valuations - being given to debt relating to sub-prime loans. Everybody looked the other way as debt was repackaged. Essentially prudent and professional practices went out the window as investment bankers became consumed by greed and how to max out on their bonus schemes.

In the end, the people who continued to be boring bankers (ie prudent and professional) are now rescuing those who were consumed by the financial equivalent of bling.

How does this all relate to the art world?

Well, people with funds accumulated no doubt from some of the profits which accrued during the 'bling' years have been investing in contemporary art as if it's some sort of hedge fund.

The buyers had begun arriving hours earlier: hedge-fund managers in suits without ties, New York dealers, a smattering of Russian oligarchs, women with expensive, understated jewellery and expensive, overstated lips. There was much air-kissing and rubber-necking. It was like an exclusive cocktail party with no cocktails, a Hollywood premiere with no film..........
Alongside the Russian oil magnates, the Chinese businessmen, the Indian digital billionaires and the Middle Eastern oil barons are the hedge-fund managers and private-equity managers, with money to burn and large walls to decorate. The buying power of London’s richest citizens is now greater, compared with the average earner, than at any time since the 1930s, according to the Financial Times.
Times Online 23 June 2007 Millions to spend, bare walls to fill and a frenzy for fine art

This week has also seen Damien Hirst generate something like £111 million (c$200 million) from Beautiful Inside My Head Forever, the two day auction of his work at Sotheby's. I say "his work" - his ideas, possibly appropriated from others and made by his apprentices in his art factories might be a more accurate description. A read of the work philosophy and appropriation sections of the wikipedia article about him is enlightening. Is he really working in the traditions of the Master Artists and their ateliers or not? What do you think?

Yesterday, in another irony, Forbes published its rich list - The Forbes 400

Rising prices of oil and art paved the way for 31 new members and eight returnees, while volatile stock and housing markets forced 33 plutocrats from our rankings.
Forbes - The Forbes 400

Some of the people in the rich list are only there because of their art collection.

Volatile markets have bruised several fortunes of The Forbes 400. But swelling contemporary art prices have provided an unexpected hedge.
Forbes - The Color of Money

Except there's a catch.

In my view, the value attributed to some contemporary art is vastly over-rated. I simply do not believe the values attributed to it. I'm standing here on the sidelines - in my capacity as somebody who neither aspires to produce art like Hirst and his ilk or to own their art either - and asserting that an awful lot of that art seems to me to have neither real substance nor value.

The people who are asserting that such art does have both substance and high value too often seem to be the same people who have a financial interest in so doing. But they would say that wouldn't they? It just doesn't make it true. The only truth is that you can't make your commission or bonus unless you also continue to say this is a valuable asset.

Let me be clear, I'm not saying that all contemporary art is over-valued. I'm certainly not saying all contemporary art is rubbish. What I do think are quite ridiculous are the stratospheric valuations attributed to some of it - particularly at the high end of the market.

I think it is also possible to compare some contemporary art that has attracted unwarranted valuations to derivatives (or "financial weapons of mass destruction" as Warren Buffet termed them in 2002). Why? Well rather a lot of it seems to have been about taking other people's ideas and repackaging them with a lot of marketing hype which says the new version is worth an awful lot of money. I just question why one should value a conceptual idea or that approach that highly. I certainly don't - and I emphatically don't when I look at all the other alternative options for what one can do with the sort of money which is currently being paid for art. What on earth has happened to moral values when the philanthropy that used to be exercised by the moneyed classes has now been usurped by a need for brand names and bling instead?

The toxic debt in the banking sector is currently rocking the share values and even the survival of some banks. My prediction is that over-hyped and over-valued contemporary art will also start to lose value just as soon as there are rather fewer players in the marketplace - and that could be very soon. Many of those hedge fund managers attending the auctions could soon be without a job - if they haven't already lost it. Those who have still got a job might be looking for a safer place for their assets. After all, they know that the art market like any other is essentially cyclical - it just lags behind the financial markets.

It is unlikely that art will retain its value in the current slump, despite the record-breaking Damien Hirst sale earlier this week.
Guardian - Forbes rich list highlights pre-banking crisis fortunes (my bold)

At least when contemporary art market values finally start to tumble, the tax payer won't need to fund the creation of a federal agency to look after all the over-valued items of art........

For those wanting to understand a little bit more about how the art economy works and how values are arrived at for art as an investment, I'm trying to develop a new section on the art economy within my information site Art Business - Resources for Artists. It also has tips about how to sell art in a weak economy!

[Note: Image from Wikimedia Commons: Ilustration of "The Emperor's New Clothes" by Vilhelm Pedersen (1820 - 1859) ]