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Financial Risks and Rewards of Investment in Art. TEFAF 2012 [email protected] TUTELA CAPITAL

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Page 1: Tc presentation tefaf

Financial Risks and Rewards of Investment in Art.

TEFAF 2012

[email protected]

TUTELA CAPITAL

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Market risks Liquidity risks The future Conclusion

Prices went up and down…

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The past

Sources: Tutela Capital SA

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Market risks Liquidity risks The future Conclusion

Prices will go up and down…

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The future

Sources: Tutela Capital SA

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Market risks Liquidity risks The future Conclusion

Prices will go up and down…

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The future

Sources: Tutela Capital SA

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Prices will go up and down…

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The future

Sources: Tutela Capital SA

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Prices will go up and down…

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The future

Sources: Tutela Capital SA

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Market risks Liquidity risks The future Conclusion

Uncertainty = risks

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The future

Operational risks

– Fire, destruction, flooding, theft, etc. – One can (and should) be insured fort these ones

– Forgery/misattribution risks – Can be mitigated (e.g. : by buying at TEFAF and not at ……)

– Transaction management: buy well, sell wisely

Financial risks

– Losing money on an investment (or market risks)

– Being unable to sell when you need to (or liquidity risks)

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Market risks Liquidity risks The future Conclusion

How much a collector can possibly gain/lose?

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Measuring market risks

– Prices sometimes behave erratically

– The more volatile is a market, the riskier it is

– “Volatility” is a sure feature of prices

– “Volatility” is more or less constant through time

– “Volatility” is common to many artworks

Idea: extract volatility and project it onto the future

Market risks

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Market risks Liquidity risks The future Conclusion

How much a collector can possibly gain/lose?

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Example: Canaletto

– Yearly volatility of returns of an investment in Canaletto: ~21%

Market risks

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How much a collector can possibly gain/lose?

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Example: Andy Warhol

– Yearly volatility of returns of an investment in Warhol: ~34%

Market risks

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Market risks Liquidity risks The future Conclusion

How to minimize risks/maximize returns ?

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1. Compare

– Quantitative tools needed at professional level

– Pen and paper will already help collectors and amateurs

– Estimate risk and return of targets, write them on paper

– Compare and discard the bad profiles

Market risks

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How to minimize risks/maximize returns ?

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2. Diversify !

– Collectors have difficulties diversifying

– Art market prices co-move for the same artist and within the

same movements

– A drop in Warhol will likely open path to a drop in Basquiat

– Warhol is unrelated to Canaletto !

– Diversification leads to same rewards, with less risks

– Overcoming current needs to collect can help achieve more

“collecting power” over the long run !

Market risks

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How to minimize risks/maximize returns ?

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Optimality across the art market: choice of a fixed risk

Market risks

Sources: Tutela Capital SA

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How to minimize risks/maximize returns ?

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Optimality across the art market: choice of a fixed risk

Market risks

Sources: Tutela Capital SA

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How to minimize risks/maximize returns ?

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Optimality across the art market: choice of a fixed risk

Market risks

Sources: Tutela Capital SA

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Market risks Liquidity risks The future Conclusion

Diversification is also interesting to manage liquidity risks

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Liquidity risks

– The probability of not being able to sell an artwork

– Part is due to the artwork

– Part is due to brokers/intermediaries

– Part is due to the market

Liquidity risks

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Diversification is also interesting to manage liquidity risks

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Liquidity risks

– The probability of not being able to sell an artwork

– Part is due to the artwork

– Part is due to brokers/intermediaries

– Part is due to the market

– Reward: buy illiquid artworks at discount !

Liquidity risks

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Diversification is also interesting to manage liquidity risks

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Top liquid artists at auction, 2012

Liquidity risks

Sources: Tutela Capital SA, arnet

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Diversification is also interesting to manage liquidity risks

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Liquidity is time-dependent

Liquidity risks

Sources: Tutela Capital SA, arnet

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Market risks Liquidity risks The future Conclusion

Financial Risks and Rewards of Investment in Art.

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– Prices go up and down

– Operational risks can be mitigated: insurance, etc.

– Financial risks can be managed:

– Compare, diversify to manage market risks

– Time your selling to manage liquidity risks

– Invest confidently, the art market is the only one immune against

bankruptcy !

Conclusion

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Financial Risks and Rewards of Investment in Art.