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Over the last several years, art has become increasingly popular as an investment. For one thing, technology has eroded traditional entry barriers for prospective investors. And, such investments are not directly affected by those worrisome stock market fluctuations.

But did you know there’s a way to invest in art without buying it?

There is, and it’s called art fund investing. Keep reading to learn more.

Explain Art Funds

Basically, these are privately offered investment funds that aim to produce returns by buying and selling art. Management firms are paid a fee to administer such funds. These companies also get a portion of the returns they deliver.

So, in lieu of buying a single piece of art on your own — which can be very costly — , you’re investing in art indirectly through the fund, which makes all strategic decisions including what art it buys. Note that while art funds do own their art for an average of up to seven years, acquisitions must be offloaded within the fund’s lifetime.

The bottom line is art funds are in the business of buying and selling art.

How Do Such Funds Work?

A manager, who typically also has capital invested, runs each fund. There’s also an art market professional on board who, through their expertise, balances out the fund’s investment skills.

Fund managers are usually charged with scouting potential acquisitions, handling investor relations, raising capital and handling investor relations as well as the fund’s administrative compliance. Other responsibilities include making sure the works are properly stored and insured, monitoring the art market as well as the fund’s artists, and promoting the portfolio through loans to museums and exhibitions.

How are Art Fund Managers Compensated?

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Art funds managers’ compensation is largely based on performance. Such a performance fee typically comes out to about 20 percent of profits from the portfolio’s disposition. In addition, annual fees are usually up to 3 percent of the portfolio’s net asset value or the total fund investors’ capital pledges.

How Do I Know What a Fund’s Up To?

Say if you invest in art, the fund will periodically keep you updated on its performance through information and disclosures.

How Long Does It Take to Receive Returns?

It’s important to note that such investments are long term. After investing for three to five years, you likely won’t see returns for between five and seven years.

Are There Downsides to Art Fund Investment?

You can make money, but as we said, it may take a while to see the return on your investment. Also, art lacks liquidity in general — you can’t easily unload it — and once you’ve invested capital, you won’t be able to withdraw your contribution or sell your equity interest.

Still though, many investors do quite well with this asset class.

Must I Have All My Committed Contribution at Once?

For better return rates, art funds don’t usually draw down their capital all at once. However, because you never know when a fund will call for the balance of your commitment, you must have your capital ready.

Do Art Funds Use Multiple Vehicles?

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Yes, so they can do business with investors on a global basis without compromising liability protections or tax positions. Using both offshore and onshore funds enables managers to receive contributions from domestic and foreign sources, salvage investors’ tax positions, and toggle investments between funds.