Art Investment

How to navigate the liquidity risk of alternative investments

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Juan Dominguez

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19 November 2018

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When it comes to the alternative investment landscape, it can be wise to treat it like any other investment opportunity.

That is, using portfolio diversification to minimise your exposure to risk. It’s one of the first things that an investment professional will advise, especially when it comes to markets that can be unpredictable at times of economic uncertainty.

Art is one of the world’s favourite alternative investment opportunities, especially when it comes to people looking to diversify their portfolios. According to Artprice’s report called The Art Market in 2017, more than 413,000 artworks were sold through auctions during the year, which was a new record.

It also mentions that there is a ‘low unsold rate’ of 34% in the west, and that the market is in buy mode. The appetite for art as an alternative and diversified investment opportunity is there.

Despite its popularity, however, art can also represent quite a risk when it comes to liquidity; Artprice touches on this when highlighting that, despite the positives, the art market “remains ruthlessly selective”.

 

Considering the liquidity of art as a diversified investment opportunity

Art is attractive to many investors who want to diversify because it tends to be resistant to external market pressures and holds its value well, even delivering high returns for blue-chip artworks. However, there’s a drawback in that, traditionally, selling a painting or sculpture is a non-trivial process.

Firstly, the art market is selective. Outside of the upper echelons of artists who can be relied on to sell for tens or hundreds of millions at auction, investor appetites can be subdued, tastes can change and it can be difficult to sell artworks profitably - if at all. For example, as Artprice points out, two previously fashionable artists two American artists - Jacob Kassay and Parker Ito - have seen the price of their works divide by ten since 2014.

Secondly, in order to sell artworks, investors typically rely on auction houses. This can cost them a commission of up to 25%, and their success at auction can be affected by dozens of factors - from time, to location, to publicity and how deep attendees are willing to reach into their pockets.

All this makes art a difficult asset to liquidate - assuming you rely on the traditional avenues.

Can blockchain improve art as an alternative investment?

One possible solution to the liquidity risk of alternative investments - art included - is to change the ownership model so it’s not always a case of wealthy investors looking to outbid each other on a small pool of high-value assets.

Specifically, a shared ownership model could potentially lower the cost of entry to the market, allow a much wider pool of investors to participate, and therefore improve liquidity.

This is what Maecenas has successfully introduced to the art market. Using blockchain technology, we make it possible to trade fractional digital interests in artworks online - without going through auction houses, and without the potential liquidity issues that arise when you need to find a buyer for an entire artwork.

In our beta auction, for example, we raised $1.7 million from a pool of investors worldwide to buy 31.5% of an Andy Warhol painting, 14 Small Electric Chairs (1980).

The Maecenas approach helps to negate high commissions found in auction houses and expand a person’s art portfolio more easily and efficiently.

The Maecenas platform connects art lovers the world over. It’s a more open marketplace than the art world has seen before, and allows people to trade and own digital shares more quickly and easily than can be found in the traditional art market.

For art owners too, that allows them to liquidate their artworks more quickly thanks to Maecenas’ open global platform. Find out more by downloading our Art Investment Explainer Document today!

FREE Art Investment Explainer Document >

 

Topics: Art Investment

Juan Dominguez

Written by Juan Dominguez

Prior to joining Maecenas, Juan worked for major global banks such as JP Morgan, ING & ANZ. With a career spanning four different countries (UK, Australia, Netherlands & Spain), he has experience on a wide range of transactions including Institutional Banking, Real Estate, Corporate Advisory & Private Equity. He holds a bachelor of International Business and a Master of Applied Finance from Macquarie University, with an award for high achievement.

Please read the following disclaimer >

This blog post is illustrative and for informative and general education and discussion purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. This information is provided with the understanding that with respect to the material provided herein (i) MAECENAS is not acting in a fiduciary or advisory capacity under any contract with you, or any applicable law or regulation, (ii) that you will make your own independent decision with respect to any course of action in connection herewith, as to whether such course of action is appropriate or proper based on your own judgment and your specific circumstances and objectives, (iii) that you are capable of understanding and assessing the merits of a course of action and evaluating investment risks independently.. MAECENAS does not purport to and does not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You should consult your advisors with respect to these areas and any material with regards to investment decisions. You may not rely on the material contained herein. MAECENAS shall not have any liability for any damages of any kind whatsoever relating to this material. No part of this document may be reproduced in any manner, in whole or in part, without the written permission of MAECENAS except for your internal and/or personal use. This material is being provided to you at no cost and any fees paid by you to MAECENAS are solely general educational purposes. All of the foregoing statements apply regardless of (i) whether you now currently or may in the future become a user of MAECENAS’s platform or products and (ii) the terms contained in any applicable contract between you and MAECENAS.

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