Examining Fine Art as an Alternative Investment

The 2008 economic crisis has greatly affected how people are choosing to invest their money. Many investors have been more cautious of investment opportunities and the risks they impose, which has led to an increased interest in alternative investments. People are starting to look beyond the typical alternative investments such as hedge funds, commodities, and private equities. In order to examine the possible gain from investing in art, I studied the returns in the art market compared with returns of other types of financial investments, in particular equities. In this paper, I have used an art index that was developed by Dr. Roman Kraeussl, which was created by employing a two-step hedonic regression methodology on art prices, devised by Kraeussl and van Esland (2008). When computing annualized returns I found that art yields the highest return at 12% followed by returns from the S&P 500 at 3.6%. Government bonds and treasury bills had negative annual returns of -8% and -17.5% respectively. Looking at the Sharpe Ratio, the results suggest that art is twice as risky as equities. A CAPM regression showed that the Top 500 Art Index moves in the same direction as the S&P 500 and had a correlation of 13.9%. Based on these results, I concluded that fine art is not a useful asset to hedge returns of the S&P 500. Though it has monetary value and possibilities of appreciation and high returns, there is too much risk involved for any investor to be convinced that art would be a reliable investment opportunity. There are many costs, such as transaction costs, commission rates, auction premiums, etc. that greatly influence the purchase of art that are different than for most financial assets. There are also social and emotional factors that affect the decision to buy art since most people who purchase artwork have some sort of connection to the piece. A great deal of uncertainty exists if you do not choose to buy art for its fiscal benefits, which increases its risk. Purchasing art for its financial incentive could be successful if the buyer has the money, is knowledgeable about the market, and has some attachment to the work of art