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    new world

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    Blog Comments posted by new world

    1. Collectables can be viewed as investment into art. There are numerous individuals and investment funds who use art and antiques as supplemental investment vehicles. They also can be effective diversification instrument.

      For example, some Russian banks have dedicated professionals who search for and invest into Russian Imperial awards. I've seen some of them at the military fairs and auctions buying Russian awards for their investment portfolios. It's quite profitable as well, as since beginning of 2000s until 2008-09 prices of Russian awards increased several fold. The prices came down during last credit crisis, but they still at very nice levels.

      But of course this applies only to some awards, not all awards realized such profits.

       

       

      There's a special class of investments, called Alternative Investments. Many private and hedge funds invest into them.

      There are some studies of the market, for example:

      ART    AS  AN   INVESTABLE    ASSET    CLASS

      There are several reasons why art has become increasingly popular as an investable asset class. These reasons include:

      - High net worth individuals see investing in art as a strategy for accumulating wealth. Newly wealthy investors in countries such as China, Brazil, India, and Russia demand art and as a result have driven up auction prices for art.
      - The demand for art has been generally strong through  time.
      Investors may profit from inefficiencies due to private valuations and illiquidity in the market for art. In addition, there is a lack of transparency in auction markets because while auctions are public, clearing prices for works of art are not.
      - Art values are typically independent  of financial market asset values.

      It is difficult to construct  an art index to measure performance because art markets are characterized by infrequent  transactions. Also, the assets themselves are quite unique
      and prices tend to be smoothed  due to infrequent  trading. In these ways, art is a bit like commercial real estate. Additionally, there might be great demand in one sector of the market, leading to incorrect assumptions about demand  and prices in other sectors.

      Two index construction  methods  exist that attempt  to   deal with the issues of illiquidity and heterogeneity. They are:
      Hedonic  price estimators.  This regression method  creates a continuous price series by controlling for the unique characteristics of art that changes hands (i.e., actual prices from infrequent transactions).
      Repeat sales estimators.  The repeat sales methodology is a technique used to determine price trends and returns for idiosyncratic assets. This regression method  focuses on art that changes hands more than once (i.e., the method uses pairs of observations on the same asset).
      These methods are also used to construct  real estate indices because, like works of art, real estate assets are heterogeneous and illiquid.

      Studies of art returns are normally based on hammer  prices. The hammer price is the final auction price, but does not take the commission to   the auction house into consideration. Commissions  are quite high and can amount  to up to 25% on a round-turn transaction (i.e., commissions are paid when you buy and then when you sell the artwork). Assuming
      25% total buy and sell commissions, it can take an investor 10 years of price appreciation
      to recover the commission charges, based on the 2.2% long-term median real rate of return on art. The financial returns are low but some argue that it is the combined financial
      benefit with the non-financial  benefits of ownership (i.e., the joy of owning, viewing, and
      controlling the art) that drive some investors to hold art.

      There are two interesting idiosyncrasies of the art market that might help investors develop an investment strategy based on purchasing art. First, there is the masterpiece  effect. This theory argues that expensive art is different from the rest of the market and returns will differ as well. However, ex ante there is no clear indication  of whether masterpieces should perform better or worse than the market. In a review of the related academic literature, only one study out of six found a positive masterpiece effect.

      Second is the question of whether a law of one price in art markets is important  to the investor's strategy. There is only weak evidence to reject the law of one price in art markets. In other words, prices do not vary significantly across geographic markets. A Picasso in London is priced similarly to a Picasso in New York. This means investors cannot arbitrage differences across locations and auction houses.

      Spaenjers (2010)4 considers more than one million art transactions across 13 countries beginning in the 1960s. He finds that holding period returns average approximately 2% annually, the standard deviation of returns is approximately  17% annually, and prices do not vary much across markets. He also finds that currency fluctuations  are not a significant driver of art returns. Higher quality paintings  (i.e., the quality effect) earned higher returns and had higher volatility of returns in the Spaenjers study. In the study, Spaenjers finds that art prices are significantly explained by wealth effects (proxied by GDP growth), income inequality, and lagged equity market effects. Unfortunately,  high net worth individuals are already exposed to these factors, reducing the diversification benefits of art.

      Spaenjers, C. 2010,  "Returns   and Fundamentals  in International  Art Markets." American Art.
      http://www.hec.unil.ch/documents/seminars/ibf/430.pdf

       

       

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