Forget beauty - this art's all about money

LONDON - In September 2004, Philip Hoffman did something unusual: he bought a painting he actually likes.

It was a work by Ed Ruscha, a pop artist whose paintings hang in the National Gallery in Washington.

Hoffman says he loathes some of the art he buys. In fact, he says he barely glances at paintings that have cost millions of dollars to acquire.

The 44-year-old is a new breed of investor in the art market.

From a townhouse near Hyde Park in London, he manages an investment fund that buys and sells paintings rather than stocks or bonds.

Since 2004, a dozen or so similar funds have tried to lure investors as the price of art has soared. So far, Hoffman's is the only one that's raised enough money to start investing.

Melding art and finance, art funds aim to trade Picassos and Rembrandts the way hedge funds trade United States Treasuries or gold - and collect hedge fund-size fees in the process.

Hoffman's Fine Art Fund charges an annual management fee equal to 2 per cent of its assets and takes a 20 per cent cut of profits once the fund clears a minimum hurdle.

Hoffman, a former finance director at London-based auction house Christie's, says his fund is not about beauty, truth and passion; it's about making money.

"We take a completely cold view."

His investors need cool heads, too. He requires a minimum investment of US$250,000 ($367,329) and investors cannot withdraw their money for three years.

Hoffman will not disclose the prices at which he has bought or sold art, saying to do so will tip his hand in a market where prices of works by artists such as Andy Warhol have soared more than 600 per cent in the past decade. Trading art like T-bills won't be easy. Art is hard to value and expensive to buy and sell. Experts don't even agree about how it stacks up as an investment.

Jianping Mei and Michael Moses, professors of economics at New York University, have devised an index to measure the performance of art - sort of a Standard & Poor's 500 Index for the Matisse and Rothko crowd. Their index returned 14.5 per cent last year.

David Kusin, who runs an art economics firm based in Dallas, says that return is inflated because Mei and Moses have excluded transaction costs and works that fail to sell at auction.

Jeremy Eckstein, a London-based art consultant, says for art funds, the biggest challenge of all may be that there's no way of knowing whether today's hot artists will be popular years from now.

These days, many collectors spurn 19th-century Impressionists such as Claude Monet and Pierre Auguste Renoir, who were all the rage in the 1970s and 1980s, in favour of paintings by contemporary artists such as Elizabeth Peyton and Richard Prince.

"You can't commodify art like corn or soybeans," says New York art dealer Andrew Fabricant.

He says art funds - and their investors - are taking a big gamble. The market has not been this heady since 1990, when Ryoei Saito, then chairman of Daishowa Paper Manufacturing, set a world record by paying US$82.5 million for a single painting, Portrait of Dr. Gachet, by Vincent Van Gogh.

The next year, as Japan's economy sputtered, art prices began to tumble.

Prices of Monets and Renoirs have slid more than 35 per cent in the past 15 years. The art world suffered another shock in 2001 when former Sotheby's chairman Alfred Taubman was convicted of fixing prices with Christie's.

Since then, art prices have spiralled higher. At a Sotheby's auction in New York in 2004, an anonymous buyer paid US$104.2 million for Pablo Picasso's Boy With a Pipe.

In November, at Christie's in New York, a buyer snagged Rothko's Homage to Matisse for US$22.4 million and Lichtenstein's In the Car went for US$16.3 million.

In all, the auction raked in US$157.4 million - a record for a sale of postwar and contemporary art. It also set record prices for works by 16 artists, including Prince, Ruscha and Warhol.

Marc Porter, the president of Christie's Americas, says the present art boom, particularly in contemporary paintings, has not yet reached the speculative frenzy that gripped the market in the late 1980s.

Mary Hoeveler, of New York-based Citigroup Private Bank Art Advisory Service, which buys art for wealthy clients, says talk of new ways to invest in art usually heats up when the market does.

She believes art funds and their investors will have to tread carefully.

- BLOOMBERG