WO2008079196A1

WO2008079196A1 - Investment method

Info

Publication number: WO2008079196A1
Application number: PCT/US2007/025429
Authority: WO
Inventors: Kimberly Kleinbaum; Zheng Diao; David Kaczorowski; Jun Xu; Alexey S. Rylov
Original assignee: Kimberly Kleinbaum; Zheng Diao; David Kaczorowski; Jun Xu; Rylov Alexey S
Priority date: 2006-12-15
Filing date: 2007-12-13
Publication date: 2008-07-03

Abstract

Methods and systems for investing in art, particularly by an investment fund such as a hedge fund. The methods and systems include both value-oriented strategies and quantitative-oriented strategies. Value-oriented strategies include (but are not limited to): buy & hold, dealer lending, distressed, and opportunities & events. Quantitative-oriented strategies include (but are not limited to): options and structured products.

Description

INVESTMENT METHOD

Cross-Reference to Related Applications

This application is a continuation-in-part of, and claims priority to, United States provisional patent application no. 60/874,964, filed December 15, 2006.

Background of the Invention

Field of the Invention

This application relates to methods and systems for investing in art, particularly by an investment fund such as a hedge fund. Description of Related Art

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary

Brief Summary of the Invention

This application relates to methods and systems for investing in art, particularly by an investment fund such as a hedge fund.

It is an objective of embodiments of the invention that is the subject of the present application to consistently generate upper risk-adjusted absolute returns for investors as well as intangible enjoyment by supporting the cultural significance of art and promoting art as an asset class.

It is a further objective of embodiments of the invention that is the subject of the present application to offer investors a diversified, institutional-grade investment and risk management process, and a personal, yet scalable, way of participating in the global art markets.

Embodiments of the invention include diversified art investment strategies and methods, which include, but are not limited to, opportunities, event-driven, options, distressed investing, and lending strategies and methods. Embodiments of the invention may be practiced in any country or geographical or political region, which include, but are not limited to, the U.S.A., India, Russia, China and Middle Eastern markets

In some embodiments of the invention, assets are allocated dynamically based on top- down macro view, fundamental analysis and quantitative models, including, but not limited to, a model to value the returns on art, a model to price derivatives on art as an asset class, on individual works, and on notes issued on securitized pools of art. The use of a systematic approach to individual investment analysis and portfolio construction decisions enables the process to be replicated across time and regions.

Detailed Description of the Invention

As required, detailed features and embodiments of the invention are disclosed herein. However, it is to be understood that the disclosed features and embodiments are merely exemplary of the technology that may be embodied in various and alternative forms. The figures are not necessarily to scale, and some features may be exaggerated or minimized to show details of particular components. Therefore, specific structural and functional details disclosed herein, and any particular combination of these details, are not to be interpreted as limiting, but merely as a basis for claims and as a representative basis for teaching one skilled in the art to variously employ the technology.

Investing in art is a major investment opportunity for a number of reasons. Macro- economic trends that favor art investing include: increasing wealth in nations such as China, India and Russia as well as regions such as the Middle East; too much capital "chasing" the stock market; overinvestment in hedge fund strategies crowding out returns; and the lower level of regulation in the art market. Art markets are also inefficient (which inefficiencies can be exploited by an investor practicing the current invention) for a number of reasons, including: structural, legal, regulatory, political and cultural causes; significant participation by less financially sophisticated investors; lack of price standardization and transparency; low liquidity; and inelastic supply. Finally, there are few investors who have the necessary combination of investment skills and knowledge of art.

Art has several advantages as an asset class. These advantages include: consistently low correlations with most investment classes (including domestic and international equity, corporate and government debt and gold), and the potential to generate above average returns. By way of illustration, the Moses/Mei Index of art investments returned 14.5% per year between 1953 and 2003, and the British Rail Pension Fund earned 11.3% per year for 25 years through investment in fine art. Therefore, diversification in art has the ability to lower portfolio risk while also increasing investment returns.

Market participants (a.k.a. "market players") include art dealers, auction houses, art collectors, art advisory services and art hedge funds.

The value of art is determined by a number of factors, which can be divided in to constant determinants and variable determinants. Constant determinants include (but are not limited to): artist, medium, subject matter, size, quality, resonance, rarity and condition. Variable determinants include (but are not limited to); provenance, circumstance, literature, exhibition, global trends, tastes, promotion and venue.

Factors for the practice of the current invention by a hedge fund include: a broad and flexible fund construct, which enables alpha generation across trends, countries, tastes and market condition, decreases correlation to specific markets, and stands in contrast to many hedge funds that focus on a crowded strategy, asset class, or country/region; a multi-disciplinary team approach, which facilities informed and efficient asset allocation, and capitalizes on synergies across investment strategies; and a deep and local market knowledge and network, which are essential for access, information and investment insights, are further critical for identifying, attracting, and retaining talent, and are finally necessary for generating the greatest alpha.

The investment approach of present invention has a number of overall features. A first is diversification and allocation, which includes (but is not limited to): diversified long and short options on underlying art; a blend of market making, securitization fees, and directional volatility bets; the underlying art being diversified across countries, time and type; and hedging interest rates, currency exposure, credit risk, and the stock market's impact on the art market. A second is quantitative models, including (but not limited to): models for pricing of the options and structure products of art, models that consider the liquidity risks of the art market and other inefficiency factors currently existing in the art market, as well as possible research collaborations with academic institutions. A third is fundamental research, including (but not limited to): careful fundamental analysis of the art in the portfolio(s), related market information and intelligence (which can be shared across strategies), and both top-down and bottom-up analysis of countries, time horizon, and type to determine trends, developments, events and expected value of art.

Methods of the present invention for global art investing can be divided into two main groups: value-oriented strategies and quantitative-oriented strategies. Value-oriented strategies include (but are not limited to): buy & hold, dealer lending, distressed, and opportunities & events. Quantitative-oriented strategies include (but are not limited to): options and structured products. In some embodiments, the two groups of strategies are practiced either singly or jointly, and in any combination of the particular strategies. Buy & hold

Broadly, the buy & hold method includes three phases: purchase (using industry expertise and illiquid assets to secure the most promising assets at the most favorable prizes), hold (extract current income from the works and promote them for future sale), and sell (sell the works with the objective of realizing a capital gain).

Particular embodiments of the buy & hold method includes buying art and then renting it out for fees, collecting copyright revenues, and buying collections and selling the components of the collection in pieces (either singly or in smaller groups).

In some embodiments of the purchase phase, the practitioner avoids purchasing art through the auction market, instead buying from private collectors and other direct sources. In some embodiments, the practitioner may consider "in-kind" contributions of art from investors (subject to appraisal). In some embodiments, pieces judged to have potential for price appreciation are targeted for purchase.

In some embodiments of the hold phase, the art is rented to collectors and museums to earn current income, reduce storage expenses, and market the art for sale. The imaging rights to the art may also be sold for current income, and to increase the popularity of the art. In some embodiments of the sell phase, the art is sold through direct purchasers and art dealers. In some embodiments, the art is sold through auction houses; it is often advantageous for the practitioner to develop a relationship with the largest houses and negotiate a preferred commission structure. Dealer lending

The dealer lending method includes providing lending to cash-constrained dealers. In some embodiments, this method is targeted to dealers who need capital to buy expensive (sometimes on the order of several million dollars) inventory, but are constrained by the fact that most major banks do not lend to dealers, but only to high net worth individuals. A practitioner of the current invention provides dealers with the necessary credit to purchase and/or sell art, while charging a transaction and usage fee. Any capital the dealer withdraws to fund acquisitions is then backed by the art.

In some embodiments, a line of credit is extended to the dealer; each time the dealer withdraws from the line of credit, a transaction fee is charged (in some embodiments, the transaction fee is calculated as a percentage, e.g. 1%, of the value of the withdrawal); further, interest {e.g., 12% APR) is charged for the outstanding amount.

In some embodiments, the practitioner lends money to the dealer. In these embodiments, the practitioner provides the dealer with a percentage {e.g., up to 50%) of the value of the art, using the art as collateral for the loan; interest is charged on the amount of the loan {e.g., 12% APR). Once the dealer sells the art, the principal is returned to the practitioner. In some embodiments, a minimum amount of the loan is set by the practitioner {e.g., $500,000). In some embodiments, the practitioner also charges fees to the dealer; in some embodiments, the fees are calculated as a percentage {e.g., 1%) of the value of the art.

In some embodiments, the practitioner provides a term loan against the value of the art as collateral. In some embodiments, the amount of the loan is be expressed as a percentage (e.g., up to 50%) of the value of the art, and/or may have a minimum amount. In some embodiments, the practitioner charges interest on the loan {e.g., 12% APR). In some embodiments, the practitioner also charges fees on the loan; in some embodiments, the fees are calculated as percentage (e.g. 1%) of the value of the art. In some embodiments, if the borrower does not purchase the art, the loan is returned with a pre-payment fee; in some embodiments, the pre-payment fee is calculated as a percentage (e.g., 2%) of the value of the loan.

In some embodiments, to manage the risk of the dealer's creditworthiness, a credit analysis is performed in dealer lender methods. Distressed

In some embodiments of the distressed method, a practitioner pays art owners for their collateral. In another embodiment, art is bought from the owner when the owner is in need of liquidity, rather than the owner selling the art at auction. In some embodiments, art is bought at a steep discount, and the owner is offered the option to buy the art back at less than market price (which option may only be available within a limited timeframe). In yet another embodiment, investors have the option of depositing art rather than cash in order to invest in a fund. In some embodiments, the practitioner offers a line of credit to collectors and dealers, using the art as collateral; the borrower may also keep the art, and pay a higher interest rate (subject to credit approval). In some embodiments, art held as collateral can be offered in the rental market, further increasing income.

Advantages of embodiments of the invention include: short turnaround of loans (allowing immediate liquidity); increase in the sale price of art due to the fund liquidity, vis-a-vis a hurried sale by a distressed owner; the inherent illiquidity of the art market provides opportunity for lending at a substantial premium; use of the optional buyback provides additional premium, with negligible added expense; distressed loans would come at sub-prime lending rates, while collateral would mitigate the loss from default. To manage the risk of possible changes in value of the art, appraisals are performed in some embodiments. To manage the risk of fraud, background checks are performed in some embodiments. Opportunities & events

In some embodiments, the opportunities and event method includes buying art from an artist or collector, and taking possession of the art upon the death of the artist or collector. In yet other embodiments, the practitioner buys art from emerging markets, war-torn regions, or other markets where art is limited for social reasons.

In other embodiments, the practitioner buys art from a specific country/region, and then sells the art to clients from that country/regions; the clients may be located in the country/regions, or internationally. The countries/regions may include (but are not limited to) China, India, Russia, and the Middle East.

In some embodiments, the practitioner concentrates on emerging countries' antiques, unknown artists, and/or contemporary artists. The practitioner can also buy art through the artists, families, and dealers who work with the practitioner (or fund).

In yet other embodiments, the practitioner buys art specifically of artists expected to pass away. In some embodiments, the practitioner buys art of people/civilizations that are at risk of disappearing due to war crimes, war, and unrest; in some embodiments, the art is bought in emerging countries, including (but not limited to) the Middle East and/or Africa. In some embodiments, the practitioner buys art from collectors who are about to pass away, and may further structure products towards purchases from the collector's estate. In yet other embodiments, the practitioner buys works that are culturally and historically significant to populations of particular countries/regions (in some embodiments, emerging countries); such works may focus on themes including (but not limited to): Communism, agriculture, genocide, oil, war and religion.

To manage the risk of possible changes in appraisal value and market value, accurate appraisals are performed in some embodiments, and deep markets relied on to minimize the risk of a change in market value. Options

In some embodiments, the practitioner provides a contract to a collector to guarantee the value of the art; the practitioner is paid in cash to guarantee the value of the art. In some embodiments, the practitioner writes a put option on the art. In some embodiments, the put option is priced using a pricing model.

In some embodiments, the practitioner engages in underlying hedging with other similar art work in the portfolio.

In some embodiments, a directional volatility strategy is employed. In the context of the current invention, a directional volatility strategy refers to a practitioner expecting the asset to become more or less volatile in the future, and therefore taking a view on the volatility of art as an asset class. Option pricing depends on this volatility and a practitioner can use an array of options strategies to take advantage of the view on the volatility of art.

In some embodiments, a practitioner can borrow against the future value of the art. This may include a reverse mortgage on art; it may also include paying cash to a collector and taking possession of the art upon the collector's death or the contract expiration.

To manage the risk of possible loss or fraud, the practitioner may obtain insurance and appraisals of the art assets. Structured products

In some embodiments, the practitioner creates a pool of art, which is then securitized to generate capital. Advantages of these embodiments include low risk and fee generation. In some embodiments, options on the note are available. With options, derivatives are issued on notes backed by a specified pool of artworks rather than on one artwork itself or a broad-based index of art. In some embodiments, a practitioner can create derivatives that take a view on market interest rates into account, or a view that takes credit default swaps into account and bet on the credit risk of the notes. Risk management

Since investing inherently carries some risk, embodiments of the invention include practicing risk management strategies. In some embodiments, the risks of appraisal and market values of art are compensated for by appraisals and deep markets, by which is meant markets with many participants.

Since art from similar time periods and media are subject to correlation in value, a practitioner can, in some embodiments, mitigate this risk by review of an asset "master list" for concentration risk, and ensuring appropriate diversification of the portfolio.

In some embodiments, liquidity risk is mitigated through a pursuit of the deepest markets and through strong relationships with major auction houses and dealer networks.

The risk of fraud includes both fake artwork and theft by custodian; in some embodiments, it is mitigated through careful appraisal, credit checks and cooperation with the authorities in the event of a loss.

Appraisal risks include the fact that estimates of current value are used to make market timing decisions and judge holding gains; prediction of change in the value dictates investment decisions. In some embodiments, this risk is mitigated by using a system of independent contractors to eliminate conflicts of interest. Practitioners of the current invention may work with both appraisers and credit analysts to make investment decisions and fund the execution of those decisions.

In some embodiments of the invention, assets are kept with other parties. In some embodiments, thorough electronic records of locations of all assets (modeled after, e.g. , the aircraft leasing business) are kept to mitigate this risk.

Some pieces of art (e.g., "national treasures") may not be legally transportable out of the home country. In some embodiments, this risk is managed by reference to international law and maintaining a "black list" of unfriendly countries.

Some promising areas of investment are in states of political upheaval (e.g., the art may risk suffering damage due to war). In some embodiments, this risk is managed by requiring riders for "acts of war" damage on all insurance policies.

Since some promising art is located in unsafe areas, a practitioner, in some embodiments, manages this risk by taking all reasonable precautions when traveling to such areas, including bodyguards, kidnap/ransom insurance, and limiting of cash dealings.

To manage the risk of stolen or looted works, which works are subject to confiscation (and total investment loss), in some embodiments a practitioner thoroughly reviews all documents and only deal in works with clean titles.

In some embodiments, the invention also includes a disaster/rollup plan; however, the lack of liquidity in the market in the business model makes a Long Term Capital Management- type event very unlikely. In some embodiments, a disaster/rollup plan may include (but is not limited to): selling off assets with least encumbered assets taking first priority (e.g., internally held assets and assets approaching maturity), returning capital to investors on a first in-first out basis, and looking to institutional market for sale of loan book. Fund structure

In some embodiments, practitioners of the invention create an investment fund for practicing and managing the invention. In some embodiments, this investment fund takes the form of a master/feeder fund structure, a structure commonly used to accumulate funds from US taxable, US tax exempt and non-US investors into one central vehicle (the master fund).

The master fund consolidates feeder funds to obtain a critical mass of assets, improve economies of scale, enhance operational efficiencies and reduce trading costs. In some embodiments, the master/feeder structure provides a tax neutral platform where the master fund is incorporated in a tax-neutral offshore jurisdiction into which separate and distinct hub or feeder funds invest; the feeder funds invest all of their assets into the master fund, which conducts all trading activities; the feeder funds participate in the profits of the master fund on a pro-rata basis in proportion to the amount invested in the master fund.

In some embodiments, the master fund is based in the Cayman Islands, with feeder funds in Delaware and other international jurisdictions as needed.

In some embodiments, tax costs are mitigated through legal entities and structures. Such strategies include (but are not limited to): 1031 tax deferred exchanges, improvements, and reverse exchanges on works held two years or more; holding art in the country where it was purchased; and affiliation with Cyprus (which has tax treaties with Russia).

The above-described technology can be implemented as software in conjunction with known devices such as a personal computer, a special purpose computer, cellular telephone, personal digital assistant (PDA), a programmed microprocessor or microcontroller and peripheral integrated circuit element(s), and ASIC or other integrated circuit, a digital signal processor, a hard-wired electronic or logic circuit such as a discrete element circuit, a programmable logic device such as a PLD, PLA, FPGA, PAL, or the like. In general, any device capable of implementing a state machine that is in turn capable of implementing the processes described herein can be used to implement the systems and techniques according to this invention.

It is to be appreciated that the various components of the technology can be located at distant portions of a distributed network and/or the Internet, or within a dedicated secure, unsecured and/or encrypted system. Thus, it should be appreciated that the components of the system can be combined into one or more devices or co-located on a particular node of a distributed network, such as a telecommunications network. As will be appreciated from the description, and for reasons of computational efficiency, the components of the system can be arranged at any location within a distributed network without affecting the operation of the system. Moreover, the components could be embedded in a dedicated machine.

Furthermore, it should be appreciated that the various links connecting the elements can be wired or wireless links, or any combination thereof, or any other known or later developed element(s) that is capable of supplying and/or communicating data to and from the connected elements. The term module as used herein can refer to any known or later developed hardware, software, firmware, or combination thereof that is capable of performing the functionality associated with that element. The terms determine, calculate and compute, and variations thereof, as used herein are used interchangeably and include any type of methodology, process, mathematical operation or technique. Moreover, the disclosed methods may be readily implemented in software, e.g., as a computer program product, executed on a programmed general purpose computer, cellular telephone, PDA, a special purpose computer, a microprocessor, or the like. In these instances, the systems and methods of this invention can be implemented as a program embedded on a personal computer such as a JAVA®, CGI or Perl script, as a resource residing on a server or graphics workstation, as a routine embedded in a dedicated image system, or the like. The systems and methods of this invention can also be implemented by physically incorporating this system and method into a software and/or hardware system, such as the hardware and software systems of a computer. Such computer program products and systems can be distributed and employ a client-server architecture.

Claims

ClaimsWhat is claimed is:

1. An investment method comprising: providing credit to an art dealer to purchase art and backing the credit with the financial value of the art.

2. The method of claim 1 , wherein providing credit comprises providing a line of credit to the dealer.

3. The method of claim 2, further comprising charging a transaction fee based on the amount of money withdrawn from the line of credit.

4. The method of claim 2, further comprising charging interest on the amount of money withdrawn from the line of credit.

5. The method of claim 1, wherein providing credit comprises lending money to the dealer, the loaned money being equal to a percentage of the value of the art, and using the art as collateral for the loan.

6. The method of claim 5, further comprising charging a transaction fee based on the value of the art.

7. The method of claim 5, further comprising setting a minimum amount to be loaned in order for the dealer to be eligible for the loan.

8. The method of claim 5, further comprising the dealer returning the loaned money to the lender upon sale of the art.

9. The method of claim 5, further comprising charging interest on the loaned money.

10. The method of claim 5, further comprising lending no more than 50% of the value of the art to the dealer.

11. The method of claim 1 , wherein providing credit comprises providing a term loan again the value of the art.

12. The method of claim 11, further comprising charging a transaction fee based on the value of the art.

13. The method of claim 11, further comprising charging a pre-payment fee if the dealer does not purchase the art, the pre-payment fee being a percentage of the value of the loan.

14. The method of claim 1 1, further comprising setting a minimum amount in order for the dealer to be eligible for the loan.

15. The method of claim 1 1, further comprising charging interest on the loaned money.

16. An investment method comprising: providing a contract to an art collector to guarantee the value of art owned by the collector.

17. The method of claim 16, further comprising writing a put option on the art.

18. An investment method comprising: borrowing against future value of art.

19. The method of claim 18, wherein borrowing against future value of art comprises putting a reverse mortgage on the art.

20. The method of claim 18, wherein borrowing against future value of art comprises entering into a contract with an owner of the art, paying the owner cash, and collecting the art upon the death of the owner or expiration of the contract.

21. An investment method comprising: identifying at least one geographical or political region where there exists a newly-emerging market for local art, buying art produced by at least one artist from the at least one geographical or political region, and selling the art to at least one person from the at least one geographical or political region.

22. The method of claim 21, wherein identifying at least one geographical or political region comprises identifying a country.

23. The method of claim 21, wherein the at least one geographical or political region is selected from the group consisting of China, India, Russia and the Middle East.

24. The method of claim 21 , wherein the at least one person from the at least one geographical or political region resides within the geographical or political region.

25. The method of claim 21 , wherein the at least one person from the at least one geographical or political region resides outside the geographical or political region.

26. An investment method comprising: identifying at least one people or civilization whose art is at risk of disappearing due to risk, buying art produced by at least one member of the at least one people or civilization, holding the art for a period of time, and selling the art.

27. The method of claim 26, wherein identifying at least one people or civilization whose art is at risk of disappearing due to risk comprises identifying at least one people or civilization whose art is at risk of disappearing due to war, war crimes or unrest.

28. The method of claim 26, wherein selling the art further comprising setting a selling price that takes into account the risk of other art from the at least one people or civilization whose art is at risk of disappearing actually disappearing.

29. An investment method comprising: creating at least one pool of art, and generating capital by securitizing the at least one pool of art to produce at least one structured note.

30. The method of claim 29, further comprising issuing at least one option on the at least one structured note.

31. The method of claim 30, wherein issuing at least one option on the at least one structured note comprises issuing at least one derivative.

32. The method of claim 31, wherein the at least one derivative takes into account a view of market interest rates.

33. An investment method comprising: creating at least one derivative on the value of art, and selling the at least one derivative.

34. The method of claim 33, wherein creating at least one derivative on the value of art comprises creating at least one derivative on the value of an art index.

35. The method of claim 33, wherein creating at least one derivative on the value of art comprises creating at least one derivative on the value of at least one specific work of art.

36. An investment method comprising: creating a quantitative model to price derivatives on art, and using the quantitative model to make investments in a secondary market for art assets.

37. The method of claim 36, wherein the quantitative model to price derivatives on art is a quantitative model to price derivates on art as an asset class.

38. The method of claim 36, wherein the quantitative model to price derivatives on art is a quantitative model to price derivates on at least one particular work of art.