The woes of the art fund market are not over as the search for fresh capital continues in the fallout from the financial crisis and worries over increasing regulation deepen. But a glimmer of hope is surfacing as investor interest begins to revive and new art investment funds emerge, writes Randall Willette.

In our first issue of the Art Fund Tracker for 2010 we explore the prospects for art fund capital raising and what lies ahead following the treacherous fundraising market of 2009. The woes of the art fund market are not over as the search for fresh capital continues in the fallout from the financial crisis and worries over increasing regulation deepen.

But a glimmer of hope is surfacing as investor interest begins to revive and new art investment funds emerge. Most recently, we have seen Anthea Art Investments announce the launch of the Anthea 1 Contemporary Art Fund, the first in a new wave of art funds to launch in 2010 and the first closed-end art fund to be authorized by the Irish Financial Services Regulatory Authority.

Similar to private equity funds and hedge funds, art fund raising slowed significantly in 2009 as investors ravaged by the financial crisis, stayed away. A poor fund raising environment, coupled with fears about the health of the economy and increased regulation resulted in a wave of art fund closures. Artistic Investment Advisers (AIA), the firm behind The Art Trading Fund announced its liquidation in December 2009 with an estimated £10.2 million assets under management.

A number of others have either failed or delayed launch because they were unable to raise capital. Most recently, Indian art funds which in many respects have been pioneers in the art fund space have come into the spotlight due to poor investment performance.

However, the outlook is looking brighter and the art fund industry is showing signs of new momentum. FAWM believes the art fund industry as a whole is adapting to the new market conditions and is recovering as performance of the art market improves. The recovery should continue in 2010, barring another major economic shock or regulatory shifts.

The biggest risks being increased regulation and a "double dip recession, as governments withdraw the extraordinary stimulus measures originally aimed at propping up the global economy. FAWM also predicts that net inflows and new art fund start-ups will likely increase, albeit at subdued rates. Alternative fund managers will very likely continue expanding their product offerings beyond hedge funds and private equity, testing different markets and embracing all available options within alternatives including art. When faced with uncertainty, diversification will continue to be the primary tool available to investors to improve their chances of investment success.

We are also seeing a new trend emerge around small and bespoke art investment funds and/or clubs favoured by family offices and high net worth investors seeking to combine their passion for art with investment planning and portfolio diversification. The desire to establish a very private art investment fund or club has grown particularly among friends and family wishing to co-invest in a particular sector of the art or collectibles market. This type of arrangement may either be self-managed or may engage the services of a third party investment manager. Given their smaller size and limited number of investors these very private investment schemes typically require much lighter reporting and regulation and as a result are less costly to set up and administer.

Although high net worth investors are gaining appetite they are likely to be extremely selective as they decide which art funds deserve their money and will remain slow to commit themselves to new funds. Art fund managers may expect the due-diligence process by investors in 2010 to be longer, more focused and deeper than ever before as investors seek improved transparency of investment process and underlying risk.

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