In the fast-evolving world of art investment vehicles, it pays to study managed art accounts, argues Randall Willette of Fine Art Wealth Management.

Randall Willette is founder and managing director of Fine Art Wealth Management, and a member of WealthBriefing's editorial advisory board.

Recently we have seen the emergence of managed accounts from art fund managers seeking to provide investors with higher levels of transparency and control, greater liquidity, and more flexible fee schedules. As art fund managers wrestle with ways to attract new capital infusion, one increasingly popular solution is to offer private single owner accounts dedicated to art investment particularly for investors with larger pools of capital. While managed accounts are introducing new support challenges for the art fund industry, they do present a valuable opportunity for art funds to attract clients and assets.

A managed art account is a specifically tailored investment vehicle dedicated to investing in a diversified portfolio of art, often set up as a limited liability corporation. All art assets within the managed account are held in the name of the managed account holder. The managed account trading strategy generally mirrors an art fund manager's reference fund, but the investment mandates can be bespoke and tailored to meet the investor’s individual requirements.

While the art fund manager is responsible for managing the funds in a managed account, many aspects of the operational infrastructure (for example custody, administration and valuation), are delegated to independent third-party providers. A managed account is separate from any other pool the fund manager may advise or provide service to, and is segregated. There is a good case for segregation of art assets, especially for larger clients that are long-term investors and don’t want to be subject to the pressure of co-investors in a commingled art fund that might want to redeem.

Within a managed account infrastructure, if the investor reaches the point where they no longer trust the manager, they can take back control immediately, rather than being stuck behind six months’ redemption notice. Even if the liquidity’s not there they can take control of the assets, either for another manager to run or to close out the positions.

When investors allocate money into a commingled vehicle, they become limited partners or shareholders, ceding control over the account to the fund manager and, at times, having limited access to their capital and to information regarding the vehicle’s market exposure. In comparison, with a managed account the art fund manager acts as an advisor, with the authority to transact the account, while the capital allocator retains ownership and control over the assets.

Historically, alternative fund managers have resisted offering managed accounts for a number of reasons. First, the heightened transparency of a managed account means investors have more insight into a manager’s portfolio and trading strategies. Second, managers lose some scale in their trading strategies and counterparty relationships. Third, managed accounts are more operationally complex, and therefore more expensive to support. But while the economics for managers may be less favourable than with their pooled vehicles, managed accounts may provide an attractive vehicle for raising capital and offering art funds the chance to grow their asset bases in this difficult economic climate.

An important question currently being asked among art fund managers and investors is whether the current shift toward use of managed accounts will make them a permanent feature of the art fund industry landscape, perhaps one day replacing pooled funds as the default option for investment, or whether some of the impetus will slip away as memories of the financial crisis of the past two years start to fade. It is FAWM’s belief that managed accounts are here to stay, certainly for investors concerned about the potential transparency and fraud risks when investing through a manager’s pooled fund. In the wake of the turbulence of the past two years, the extra cost is considered a price worth paying.

Art investment vehicles will continue their evolution and the long-term picture for managed accounts will be shaped by a combination of forces. For example, the impact that future regulation may have in stipulating greater transparency for the alternative fund industry as a whole.  As the art fund industry continues to evolve, it’s clear that the winners will be those art fund managers which have the operational flexibility to adapt and provide art investment opportunities that meet investors’ needs.  

For further information on managed art accounts contact Randall Willette at www.fineartwealthmgt.com