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Liquid Rarity Exchange

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By Nick Summers
August 14, 2012 4:19 PM EDT
Liquid Rarity Exchange Wants To Turn Fine Art into a Tradeable Security
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In 1986, two Australians came up with a way for art fans of even the most modest means to own a Picasso. They bought one—a 1959 work titled Trois Femmes—and announced plans to cut it up into 500 one-inch squares to be sold for $135 apiece.

Today, a company in suburban St. Louis says it has invented a less-destructive way to broaden the market for fine art. The Liquid Rarity Exchange plans to introduce a new type of investment vehicle that will allow investors to buy and sell shares of Renoirs, Rodins, and the like—bringing market forces to bear on masterworks and opening the exclusive club of art speculation to the investing public.

Demand for fine art and rare collectibles has been buoyant amid an otherwise iffy economy, with major works selling for eye-popping sums. In May, Sotheby’s set an auction-house record with a $119.9 million bid for Edvard Munch’s The Scream. While art can be a useful hedge against inflation, the asset class has long been inaccessible to the average retail investor, who can only watch the gavel-banging with envy.

“The benefits of rarity appreciation have basically been closed off to the public,” says John Rood, a vice president of Liquid Rarity Exchange. ”Only wealthy investors have been able to benefit from it, in a limited way. Let’s open it up.”

The Clayton, Mo., company says it has patented a technique for banks to take individual works or groups of works public, with the first offerings still 12 to 18 months away. Its argument is that by making paintings—as well as vintage cars, rare books, musical instruments, and other appraised goods—more liquid and subject to SEC regulation, the market will be fairer and priced more accurately. Also, museums would have a new way to raise funds by selling stakes in their collections while continuing to display the work of art.

Private art funds have proliferated since the 2008 financial crisis, allowing HNWIs—that is, high net worth individuals—to buy into art while avoiding certain fees and transaction costs. Rood and his partners envision fully public investment options.

“I’d wager that a mechanic that’s working on a [vintage] Bentley is more excited and knows more about how it works than the wealthy investor who’s riding in one. These small investors have the same passion; they just have less money,” says Mike Saigh, a Liquid Rarity managing partner and former stockbroker.

Until the company convinces banks to license its products, the concept of shorting Damien Hirst or a lot of Stradivarius violins remains something for the rarefied world of Wall Street art enthusiasts to ponder.

One hedge fund manager, who declined to be named, said that no serious collector or connoisseur would consider the scheme. Another prominent Wall Street collector dismissed it as ridiculous.

Adam Sender, the founder of hedge fund Exis Capital Management and a noted collector of contemporary art, finds the idea interesting. “Any time you bring more liquidity to a market and it’s done properly, it’s a good thing, not a bad thing,” he says. “The more liquidity you bring to a market, the more confidence you bring to it, and the more money flows in.”

“This is a sign of a healthy global market,” said Jennifer Zatorski, a senior vice president at Christie’s. The auction house saw top-tier art collectors spend $207 million at an event in June, with works by Yves Klein and Jean-Michel Basquiat going for top dollar, while lesser-known pieces met with more lukewarm demand.

Trading art the same way that company shares or other securities are bought and sold would pose challenges. “Betting on a specific artist is different than betting on gold,” says Sender, who last year displayed works by Keith Haring, Cindy Sherman, and Chris Ofili at his Miami home for the public to see. “It would be more akin to betting on a specific stock, where there’s macro factors and then micro factors that you have to weigh, in terms of who represents the artist, and what kind of work are we dealing with. Is it his top work? Work that’s not in favor? Is it the top of the market for that artist? Is the artist still working and putting out less desirable work and diluting that market?”

Amateurs may eventually get a chance to sort through those issues. No scissors required.

Summers covers markets and finance for Bloomberg Businessweek

Liquid Rarity™ funds could include all rarity classifications including, but not limited to collections and examples in the following categories