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Fernwood Appears to Discontinue Hedge Fund Program

by Daniel Grant

With telephone calls going unanswered and its offices in Boston, Miami, and New York City seemingly empty of staff, it appears that the once-heralded Fernwood Art Investments has quietly discontinued its art hedge fund program for wealthy investors. Observers report a “bust-up” among the two-year-old company’s principal directors, which include managing directors Patrick Cooney (who founded Citibank’s Art Advisory Service in 1979), Rachel Kaminsky (former head of Christie’s old masters department), and Michael Plummer (former marketing director for Sotheby’s), and CEO Bruce Taub (a former Merrill Lynch executive).

“Too many cooks spoil the broth, they say,” one observer noted, “and there was no one who could drive it all forward.” The good news, he added, is that while the company had spent money putting the concept together and renting office space, Fernwood “didn’t lose any money for investors.” In fact, it is not clear that any investment assets had been collected or any artwork purchased for the fund.

The apparent disappearance of Fernwood has left the field to just one remaining art investment company, the London-based Fine Art Fund, which currently operates one fund and expects to launch two more this month. “At the moment, I’m extremely pleased,” said Philip Hoffman, the Fine Art Fund’s director and a former deputy managing director at Christie’s, noting that the fund’s “compound profit on assets bought and sold is forty percent.” He declined to reveal the number of investors in the fund, stating only that they hail from ten countries around the world and have contributed between $250,000 and $10 million apiece. He also offered no comment on the number of artworks purchased by the fund, but he stated that most are valued between $500,000 and $2 million, with one work, an old masters painting, “priced at eight million dollars.”

The fund invests in artwork in four separate categories—old masters, Impressionism, modern, and contemporary—in roughly equal amounts. The second fund, which like the first will have a limited number of investors, is expected to invest in similar categories of art, while the third fund will focus on Chinese objects, ancient, modern, and contemporary. “We get two phone calls a day from people wanting to invest with us,” Hoffman said. Additionally, the Fine Art Fund plans later this year to offer an art advisory service to wealthy individuals in the United States through one or more banks, although the details have yet to be finalized.

Hoffman claimed that the success of the Fine Art Fund is attributable to having “the right team to back up a good idea. You can’t just see art as an asset class but need to fully understand the market, and your team has to know how to work together.” He added that the six full-time staff and 18 off-site consultants for the current fund have a long history of cooperation. “We are opportunistic about discounted assets, and we can move quickly.”

Fernwood’s apparent demise does not condemn the concept of pooling funds to invest in artwork, Hoffman noted. “The idea is great, and we look forward to competitors in the field.” One of the main promulgators of the art investing idea is Michael Moses, a professor at New York University who, with his fellow NYU faculty colleague Jianping Mei, devised the Mei/Moses Fine Art Index (www.meimosesfineartindex.org), which tracks art assets relative to the Standard & Poor’s 500 Index. Moses also claimed that “art as an investment is still viable. We may just have to wait a little longer for examples, the right examples.” He pointed to the Fine Art Fund and the U.S.-based Artist Pension Trust (which allows selected emerging contemporary artists to deposit some of their works into storage, later to be sold as their reputations blossom) as examples of art investment strategies that are “open for business and working.” He added that “real estate investment funds in the 1970’s didn’t all work out either, but a number of people did make money in them at the time.”

Another possible drawback faced by Fernwood and some of the other two dozen art investment companies launched since 2000 that have not made a go of it, Moses said, is that wealthy investors do not see artwork simply as “a way to further diversify their portfolios. Some of them also simply appreciate art in itself and may decide to collect art, which can provide them with pleasure, as well as just invest in it.” The difference between just investing in art and collecting is that pure investing involves the ability to deduct expenses and losses while the art is in storage elsewhere, whereas collectors have the benefit of seeing the artwork where they live or work.