Prinseps


Is Art an Alternative Asset?

There is little doubt that art is an investment asset. It has been further argued that art is also an alternative asset, implying that it's returns have low correlation with the stock markets and therefore if included in one's investment portfolio improves the risk-reward profile.

Art - Alternative Asset

Let us refer to a renowned economist, Nouriel Roubini, for some guidance along with a report from Deloitte.

Nouriel Roubini On Arts

Here, I rely heavily on studies or observations by Nouriel Roubini, an economist who correctly predicted the Lehman/credit crisis which was caused by over-leverage and reliance on sub-par assets as collateral. Why Nouriel? Well, because he has a healthy dose of skepticism and tends to analyze the macro-economy without being perennially bullish. Interestingly enough, he was referred to as Dr. Doom by his critics and was disparaged on TV till the calamity-hit! As a ex-trader in a hedge fund, I have used his analysis extensively.

Cherry-picking some of his quotes as to why he thinks that Art in an asset class.

Is Art An "Alternative" Asset?

Firstly, what is an alternative asset? Loosely, an asset that reduces the risk of your portfolio is an alternative asset. The analysis below is taken from the Deloitte Art & Finance Report 2016 and clearly shows reasonable returns and an extremely low correlation with SP500 implying a better risk-adjusted return ( a higher Sharpe ratio) for any portfolio if art is included as an asset class.  

Mei-Moses-Index-Analysis 

Mei-Moses-Index-Last-50-Years 

Risk Factors/Caveats

The Mei-Moses index suffers from one major drawback - that of selection bias. The Mei-Moses index tracks subsequent re-sales of the same artwork, in a sense similar to the Case-Schiller Real Estate Index. The problem being that some artworks can be held back from a re-sale if it is thought that the work would not fetch its due price. This would cause an upward bias in the index.

Transaction costs are not entirely transparent. The buyers premium may be listed whereas the sellers premium is a private negotiation. Notwithstanding the upward bias in the index and the lack of transparency in transaction costs, art is clearly an asset class and this is a global phenomenon.

Reference Credits & Sources 

Why Art Is an Asset Class
Deloitte- Art & Finance Report 2016
Art- A Growing Asset Class