Friday, September 19, 2008

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) ]


  1. The current economic shock waves are still splashing furiously. Just wish I was able to describe it all as wisely and accurately as you have done. Thank you for another grand post.

  2. Thanks Sheona - much appreciated.

    Note that I've added in a couple of links to definitions and switched one paragraph around since I published in the the hope this reads a bit more clearly for people.

    I suddenly realised I hadn't explained what a hedge fund is!

  3. These people are not interested in how good the art is, but only its value. They treat art as a commodity.

    Damien Hirst is just a good publicitist. His art is mass produced and really no more valuable than a print that you can buy on the high street.

  4. Well said, the world of gazillion dollar art sales has nothing to do with art and everything to do with greed, vanity, you name it, all those lovely attributes that plague the "human condition".
    I think in the real world things like Damiens calf are good for a laugh and a half, nothing more.

  5. A Harry Enfield character, selling art in a shop called Modern W*nk, springs to mind! Saatchi is the one who created the monster, Hirst probably can't be blamed for taking the opportunity to part the fools from their money!

  6. Thank you for your succinct assessment. It is interesting (and scary) to see similar events happening within the financial markets throughout the world. I live in New Zealand and there are so many parallels with what is happening in the UK and US (albeit on a smaller scale). It truly is a global market now and it will be interesting to watch how the high-end contemporary art sales continue to go as there is risk in hyped-up over-valuing - it can't be sustained.

  7. I think the contemporary art market is overvalued and will correct (eventually) just like the real estate market did in the states.

    There was an article (I think it was the NY Times) about how several of the auction houses paint very close attention to Hirst's auction to gauge the probable impact of the volatile stock market on art.

    Although it's probably sacrilege to say, I don't really understand Hirst's work and it certainly illustrates what I used to joke about that "contemporary art" (ala Hirst et al) is really French for "I can't draw."

    I know his stuff is brilliant, but dead calves with golden hooves in formaldehyde just isn't my idea of art.


  8. I don't think his art is at all brilliant.

    Damien Hirst has always struck me as being rather like a used car salesman or a magician - the art is in the marketing rather than in what's being produced. A significant amount of his art has been appropriated anyway (read his wikipedia article). All he's done is done it bigger - with diamonds and gold. It's not what I call art. He is however rather good at fooling a lot of people that it is. Like I said - what does that remind you of...........

    Give me Banksy anyday! Somebody who delivers his art in the public domain, comments in a satirical way on the social mores - and who doesn't even try to sell his art or publicise who he is.

    I really like Banksy :) - not least because one of his most famous pieces is in the street just around the corner from where I go to get my car parking permit! :)

  9. I think Mongoose's comment is revealing in how Hirst fools the art world, as she says she knows it's brilliant - as if that is how it is meant to be regarded - and yet she doesn't like it. I don't think the art world works with the same checks and balances that the financial world does either. Hedge fund managers may have wrecked the system but they themselves became extremely rich and losing their jobs made no difference - they have more money than they need for the rest of their lives. (Some, not all, of course.) I read that hotels in places like Mauritius are full of these people and new companies that cater for the unusual and extravagant needs of super-rich are booming.

    Hirst is supposedly making profound comments on death but he really has nothing interesting to say and to have more of those pickled sharks waiting in the conveyor belt just says it all IMHO. He is a safe choice for people with money who need to impress and haven't got a clue! ;) Personally I think it's obscene when there are MILLIONS of people TODAY without a toilet to use, and MILLIONS of people TODAY either hungry or starving to death. It's so easy to ignore it and imagine that modern art is actually important!

  10. Thanks Felicity.

    You've reminded me of the word I had in my head when I sat down to write the post yesterday. I too think it's obscene.

    I read a comment by Nick Leeson yesterday. he's the bloke who did some foolish deals and gave Barings bank a huge liability which caused the bank to collapse

    He then went to jail for six years in Singapore.

    As he said yesterday in this article Escape of the bankrupt the architects of what has happened are morally bankrupt - but unlikely to be pursued as he was.

    Also - as he points out, the UK banking system is technically insolvent since "the value of outstanding mortgages and loans stands at £256bn while the value of deposits is only £160bn. "

    As somebody who's a qualified accountant who trained and qualified in the days when a Finance Director's other name was the "Abominable No Man", I know where I'm pointing my finger. What on earth were the accountants, auditors ad regulators doing all these years? What happened to the scrutiny and regulation of transactions, risk and off balance sheet deals?

  11. Well I think Damien is a very cunning chap, he is building a brand new very expensive "art" factory in Stroud, Gloucestershire and the roof apparently is covered in photo voltaics(might have spelt that wrong) which gladdens my heart that not only is he saving the planet by making his own electricity, he is getting it for free, sensible as well as cunning. (I will drop the sarky tone now) Wouldnt it be a fine thing if he decided to spread his wealth around a bit, maybe offering to put photo voltaics on lots of roofs of lesser, and poorer mortals, and perhaps start up some burseries for poor but good artists, anything really. I suppose he is " investing in people" after all he employs a few in his factories making his "art". (oh no there I go again) Actually if I am honest I kind of admire him and his cunningness but I also hate the fact that it is called art because I dont think it is...but then what is art? Is it art because the artist says it is, or the "art world"says it is, or is it art because someone has scratched around in their soul and pulled out something that can sit in its own right and cut you to the core, bring tears to your eyes and leave you breathless (vanGogh is one who does that for me)
    Sorry this has turned into a rant, dont publish it Katherine, I dont mind!.
    As ever your blog is interesting and thought (or rant) provoking!

  12. Rants by people I know are allowed on this particular topic! :)

  13. actually, spurred on by your blog I have just been reading up on Damien H, apparently he has begun to paint, by himself, with his own hands. So maybe I should reserve judgment, I shall be interested to see what he does...perhaps after all I am just a bit envious...and now I must get to work and stop reading blogs!

  14. Well the other thing is that most artist progress and evolve (as they get oldr) which becomes evident in their body of work. He's been making sharks and other things in formaldehyde since (was it) the 70's????

    Most contemporary art bewilders me. I do understand that my viewing the peice and my reactions are an intrgal part
    of what the artist may be doing...think flag fences and gates in central park NYC.

    Give me Delaroche's Execution of Lady Jane Gray any day
    (it's probably my all time favorite painting and those of you in London are so lucky!!! I saw it at there in the late 80's and it made my knees so weak I had to sit down.

    Forgive any typos please these comment are from my iPhone and it's sense of spelling and autocorrects don't agree with mine or my intentions.


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