How Masterworks Solves The Problem Of Illiquidity In High-End Art Investments

How Masterworks Solves The Problem Of Illiquidity In High-End Art Investments

Blue-chip art has long been a favorite among investors looking to diversify their portfolios into the realm of alternative assets. Post-war and contemporary art – for example, the works of renowned artists like Picasso, Monet, Basquiat, and Banksy – is known to offer higher annual returns than traditional assets, such as S&P 500 investments. 

Additionally, it exhibits a lower correlation with other asset classes during periods of economic instability. Art investments also tend to demonstrate strong appreciation in high inflationary periods. That makes art an excellent choice for investors looking to build a hedge against economic downturns and recessions.

But despite these benefits, not many people can afford the luxury of investing in fine art. Masterpieces by acclaimed artists involve a hefty pocket pinch, making them unaffordable for the common public. But a more serious problem that dissuades potential investors is illiquidity – that is, when your money is tied up in a painting, it can be hard to turn that asset into cash particularly quickly.

The good news is that new-age platforms like Masterworks are helping eliminate the exclusivity associated with high-end art investments. With the Masterworks app, anyone can purchase shares of a multi-million-dollar painting for as little as $20. But affordability and accessibility aren’t the only benefits. The online investment platform also ensures your assets remain liquid.

Let’s take a closer look at how Masterworks helps alleviate the problem of illiquidity in blue-chip art investments. But let’s first understand why conventional wisdom has it that fine art isn’t, as a default, a liquid asset class.

Why Art Market Is Considered Illiquid

In simple terms, liquidity is a measure of how easily and quickly you can convert an asset into other assets, ideally without affecting its market price. While cash is the most liquid asset, other examples include stocks, bonds, exchange-traded funds, mutual funds, etc. 

For example, if you buy shares of a company, you can sell them back online in a short period in case of an emergency. On the other hand, asset classes like fine art, antiques, and real estate are considered illiquid, because it’s more difficult and time-consuming to convert them into cash. Several factors, including unique market dynamics and high transaction costs, make the art market particularly illiquid.

To begin with, finding the right buyer is challenging because of the subjective nature of art. A painting that you treasure due to historical significance and aesthetic appeal may not be as valuable to others. That makes it difficult to set a standardized market price and limits the number of potential buyers. 

Moreover, selling fine art is complex, expensive, and time-consuming. Galleries are often hesitant to resell works of an artist they’ve already sold. They’re likely to make more money selling new works of the same artist. 

If you choose to sell via an auction house like Christie’s or Sotheby’s, you’ll need to be prepared to go through rigorous steps, including appraisal, authentication, and negotiation. You should also expect to shell out thousands of dollars in commissions and premiums. You might have to pay additional fees for insurance, shipping, and storage.

Worse still, the authentication process might reveal previously overlooked or unknown issues related to the asset’s genuineness and overall condition. That, in turn, can affect its market price further.

It’s also worth noting that, barring a few world-renowned names, artists who are commanding top prices today could go out of fashion in a few months or years. In other words, you could actually lose money reselling paintings by an artist who’s no longer in-demand.

All these challenges make art buyers reluctant to sell their assets. While the idea is to build a hedge against financial stress, blue-chip art investments become more of a prized family collection that’s passed from generation to generation.

How Masterworks Addresses The Challenge Of Illiquidity

With Masterworks’s mobile-friendly investment platform, you don’t need millions of dollars in the bank to invest in paintings by KAWS, Banksy, George Condo, and other acclaimed artists. Nor do you have to worry about negotiating with art dealers and auction houses to resell your assets.

The Masterworks research team uses proprietary data to identify artists with the most momentum for investing. That, in turn, makes your investments less likely to lose value over time. The acquisition team purchases a painting at an optimal price and files an offering with the SEC, allowing the public to buy fractional shares of the artwork.

Masterworks then holds each painting for three to ten years before selling it and distributing the pro rata proceeds among investors. In other words, you’re never responsible for reselling and making money from your assets. Masterworks does the heavy lifting for you.

But that’s not the only way the platform ensures liquidity. What truly resolves the problem is the secondary market on Masterworks, where members can engage in trading. If you buy shares of a painting but want to spend that money on a different investment a few months later, you can sell your shares for cash to other Masterworks community members on the platform’s secondary market.

Access to the secondary market means your money isn’t locked in for a long period. You have the flexibility to turn your assets into cash whenever you want. Since Masterworks purchases paintings by in-demand and established artists, your investments are also less likely to lose value.

Masterworks does charge a 1.5% annual management fee and 20% of any profits you make. But unlike auction houses, you don’t have to pay additional fees for cataloging, marketing, shipping, storage, or insurance. 

Blue-Chip Art Investments Without The Drawbacks

A recent report by Art Basel and UBS revealed that sales in the US art market generated a staggering $30.2 billion in 2022. It’s the highest level to date, denoting remarkable growth after the pandemic. If you’ve been contemplating adding blue-chip art to your investment portfolio, this certainly appears to be a good time.

As with any alternative asset class, make sure you build a solid foundation of traditional assets before investing in fine art. It’s also important to understand your investment goals and current financial situation to determine whether art is the right alternative asset for you.

The complexities and high costs of reselling fine art make it an illiquid asset class. However, companies like Masterworks are helping investors overcome the challenge of liquidity. The ease of trading shares of paintings on the platform makes art investments more flexible and less intimidating.