While art and commerce have never been strangers, it used to be customary to at least pretend that art was primarily an aesthetic matter. Not any longer. More and more people are speaking of art as an asset class, and few are embarrassed by the phrase "art investment." After all, why should they be? The art market as a whole returned 20% in 2007 versus 5.5% for the Standard & Poor’s 500, according to one art price index, while certain sub-sectors such as contemporary art performed even better. And at least four new art investment funds—which sell shares and use the proceeds to trade artworks for profit—have been announced in the past year and a half.
 
Actually, the idea of systematic art investment has been kicking around since at least the 1970s. The British Rail Pension Fund famously poured millions of pounds into art between 1974 and 1999, when it sold off the last of its holdings, earning a reported 11% per year on its investment. But now an increasing number of buyers—of paintings and investment fund shares alike—are looking at art from a financial point of view. "This is typical of how the current generation of entrepreneurs and financiers think about all of their assets," says Paul Provost, director of trusts, estates and appraisals at Christie’s New York.

The money is adding up. Dallas-based art economist David Kusin estimates that at least $1.2 billion has gone into art investments over the past few years, split between wealthy individuals, family offices and institutional investors—including, it is said, some hedge funds. And the reasons have everything to do with the numbers and very little to do with art. Returns on art "are above inflation and tend to be greater than for government bonds," says Randall Willette, managing director of Fine Art Wealth Management, a London-based art investment advisory service. However, he adds, equities return more than art.

But this performance comes at a price. "The returns to art since 1950 have been pretty high," says Yale economist William N. Goetzmann, "but it’s very risky and volatile." And compared to stocks and bonds, which trade on regulated public exchanges, the art market is highly inefficient. As to whether the savvy investor can profit from these inefficiencies, buying at bargain prices and selling at a premium to outpace the market as a whole, experts disagree. Art fund managers—by definition—believe they can. "Nobody seriously questions that the art market is rife with pricing errors," says Peter Walch, director emeritus of the University of New Mexico Art Museum, "but can one reasonably expect to make a profit by exploiting such discrepancies? For every hot young artist who turns out to have been an incredible buy 20 years ago, there are at least as many who saw prices briefly soar, then crash, never yet to recover."

There is also a lack of consensus about the degree to which including art in an investment portfolio can help reduce risk. "Art has very low correlation with stocks and negative correlation with bonds," says art economist Michael Moses. These are good characteristics for reducing risk. But Moses calculates correlation—which means the extent to which two kinds of assets go up and down in value at the same time—on a yearly basis, and Goetzmann argues that this approach underestimates the link between art and stocks, especially over longer periods of time. "I’m of the view that correlation with the stock market is pretty high," he says, "driven by major economic events like the Great Depression. So I would be cautious in recommending that art is a good diversifying asset."

One of the best-known attempts to quantify and track the art market is the Mei Moses All Art Index (artasanasset.com), created by Moses and fellow economist Jianping Mei, which aims to measure the annual change in art prices based on more than 12,000 auction-sale pairs. This technique, widely used to track real estate prices, focuses on works that have sold at least twice at public auctions, so their price change from one year to another is therefore known. Over the past five years, according to Mei and Moses, the All Art Index handily beat the S&P 500, returning 16.2% per year to the S&P’s 12.7%. Over longer periods, however, returns for art have been closer to those for stocks.

Another source of indexes is the London-based firm Art Market Research, the brainchild of investment analyst Robin Duthy. It provides indexes tracking some 350 sectors of the art, antiques and collectibles market, ranging from 19th-century British marine painting to teddy bears (1940–1960)—plus some 1,000 individual artists.