Art As An Investment

James R. (“Jim”) Hedges, IV was one of the early leaders in the hedge fund and alternative investments industry and is the author of Hedges on Hedge Funds. He began his career as a runner and clerk on the floor of The Chicago Board of Trade and by working as an apprentice to legendary economist, Art Laffer. He was the Founder, President, and Chief Investment Officer of LJH Global Investments, LLC, an alternative investment advisory firm. Following the sale of LJH, in 2010, he founded Montage Finance, to make asset-backed loans secured by contemporary art and is also Managing Member of Hedges-Projects (www.hedges-projects.com), a family organization created to oversee principal investments and art activities. Hedges also founded and remains a director of LJH Financial Marketing Strategies, LLC (www.ljhfm.com). Hedges has been an active investor throughout his 25-year career, representing the interests of both substantial investors and entrepreneurs. In 2017, Hedges founded HEDGES COMPANY, an Expert Network to marshal resources for its clients’ investing, growth and business development needs.
Hedges is often cited as an expert commentator on alternative investments for publications including The New York Times, Barron’s, The Financial Times, The Wall Street Journal, The Economist and Women’s Wear Daily. He is a Contributor to The Huffington Post. He has also regularly appeared on ABC, CBS, CNN, CNBC, CNBC ASIA, CNBC EUROPE, FOX NEWS, and Bloomberg TV. Additionally, Hedges was, for two years, a recurring on-air talent for CNBC’s award-winning Squawk Box (the only other permanent guest host apart from GE’s Jack Welch). Hedges was also a recurrent on-air expert for CNN’s Street Sweep. Hedges has published widely in journals including The Capco Institute and EuroMoney.
Hedges is the Founder and Managing Director of the Family Office Association of Los Angeles.
Investment Insights & Accomplishments
During Hedges tenure with LJH Global Investments, he achieved notable accomplishments in the development of the alternative investment industry. He launched the first onshore private banking fund of funds in the United States in partnership with Bessemer Trust Company. He also launched the first registered onshore fund of funds for mass affluent investors with Phoenix Investment Partners. Hedges created the most comprehensive database of hedge fund indices which were published by Reuters worldwide. Hedges developed a reputation for identifying hedge fund and private equity talent early in their lifecycle and was a seed or first year investor at firms like Symphony Asset Management, Och Ziff Management, Canyon Value, BlackRock’s hedge fund group, Reservoir Capital, and numerous other firms that went on to build multi-billion dollar businesses. Hedges also was profiled extensively for his insights into the Madoff fraud. Hedges identified Madoff as a scam in 1997 and advised his clients to stay away. His insights resulted in a profile of Hedges on ABC’s 20/20, Barron’s and Fortune. Hedges was called, “the kind of expert we like to hear from” by Barron’s.
Education Hedges attended Woodberry Forest School, Rhodes College (where he served as a Trustee), and The American Graduate School of International Management, where he earned a Master in International Management with a focus on Finance. Hedges has also participated in various continuing education endeavors and seminars including The Spencer Stuart Directors Institute at Wharton, Davos (The World Economic Forum), and coursework in Negotiations at Harvard Law School. Hedges has passed his Series 3, 7, 24, 65, 67 and 82 securities exams. Hedges was an initial consultant for the formation of the CAIA (alternative investment sector certification process). Hedges has also provided expert testimony for the Securities & Exchange Commission round table on alternative investments, The Bank of Japan and has testified before the United States Congress.
Philanthropic Endeavors James R. Hedges, IV has been an active art collector and patron for over 20 years. He has served on The Drawings Acquisition Committee at the Museum of Modern Art, as a National Council Chair for the Aspen Art Museum, A member of the National Committee of The Anderson Ranch, a Director of The Aspen Institute’s Arts Panel, as a Trustee for The Drawing Center, a Founder of The American Friends of the Tate Gallery, a Founder of The Aspen Conversations, a Trustee of The DIA Foundation, a Trustee of ArtPace, and member of the National Committee for the Whitney Museum of American Art. He is also a former Director of The National Public Radio Foundation (NPR).
Hedges has also assisted in the publishing of artist monographs including Sigmar Polke, Robert Mangold, Sol LeWitt, Ed Ruscha and numerous others. Hedges has supported artist’s retrospectives including Roni Horn at The Whitney Museum of American Art and Sol Lewitt, at the same venue. Support has also been provided to Carl Andre and Sol Lewitt exhibits at The Aspen Institute. Hedges has also made donations of numerous artworks to major institutions such as The Whitney Museum of American Art, The Museum of Modern Art, The Menil Collection, The Dia Foundation, The Tate Modern, The Hunter Museum of American Art, The Baylor School, and Girls Preparatory School.
Hedges’ activities in the art world led Art and Antiques magazine to name Mr. Hedges as one of “The Top 100 Collectors in America.”
He also served as President of The Hedges Family Charitable Foundation. In 2016, Hedges made a gift to The Archive of American Art at The Smithsonian of “The Jimmy Hedges Papers on Outsider Art,” the largest collection of materials on Outsider Artists. The Archive will serve as a permanent resource for students, curators and collectors of Outsider, Self-Taught and Folk artists.
Hedges has also made substantial contributions to his former community in Naples, Florida, where he resided for over ten years and raised his two sons. He served as the Chairman of the Boys & Girls Club of Collier County. He was a Director of the David Lawrence Foundation. He donated capital necessary to restore a historic, architecturally-important building in the center of Naples on The Tamiami Trail, which was dedicated as “The Hedges Family Visitors Center.” Hedges also donated funds for the expansion of the media center and auditorium at The Corkscrew Swamp Sanctuary and Blair Audubon Center. Hedges was also a major sponsor of The Naples Philharmonic Center for the Arts providing critical funding for numerous performances.
Hedges is also an Ambassador for Epic Foundation’s Los Angeles chapter.
Bio sourced: www.hedges.company
Alan: Jim for the guests can you give us the background of what inspired you to do what you’re doing today?
Jim: Sure well I started off in the alternative investment landscape when I was very young I had gotten very lucky to be exposed to a lot of hedge fund managers when I was beginning my career and I was fascinated with how hedge fund managers were able to invest across asset classes and develop new and innovative strategies and as a group especially in the 80s and 90s really deliver out performance so I started a firm to advise high net worth individuals and wealthy families on investing in hedge funds and we ran fund of funds of hedge funds we also created products for private equity investments and we built a business around helping people define and articulate what they could do and the hedge fund and private equity landscape into investment programs so along the way I had I’d started collecting art as a side it was really an outgrowth of coming from a family that for like four generations has been enthusiastic about art whether as art design antiques whatever I had a lot of background my dad was an artist actually my mother’s a designer so I came by this interest in art naturally and then what I found is that art was actually the super interesting investment opportunity there was actually not that different from investing in hedge funds and private equity it was an asset class it was an asset class that had very limited access to expertise and information and disclosure and transparency which again is like what private equity venture capital used to be what hedge funds used to be many years ago and so I started looking at art not just as a passion project but something that could represent really interesting investment opportunities as well so I then had this parallel track of investing in alternative investments like hedge funds and private equity for my high net worth families and clients but at the same time I was I was doing the same thing over here in the landscape and I’m very involved in that to this day so it’s been a it’s been a nice arc going from these two sides of the alternative investment sector.
Alan: When you’re moving into looking at the value of a painting or first of all let me clarify in the world of art you know it’s a very broad term can you define more what type of art?
Jim: Sure well it’s actually a super good question it’s very important to delineate the types of investments I’m talking about if you look at a universe of artists that produce art that can be purchased there is a relatively small universe of artists that are what I would characterize as investable you know if you look at the big-name modern and contemporary artists of the mostly the 20th century you’re going to find a lot of investment grade artists that that you know represent interesting opportunities I sort of view them like securities because at the end of the day whether you’re picking a stock or whether you’re picking a work of art by a particular artist you’re looking for a lot of similar characteristics in terms of you know how much volume is there with the artist what are the market prospects what’s the relative valuation to other securities or other artists so a lot of that that same decision making process that you would think about looking at an investment like a stock can also be applied to artwork.
Alan: Do you do a lot of shows when you’re selecting or do you have a specialty to say I’m going to only look for this artist?
Jim: That’s what’s really interesting about investing in art the way I’ve been doing it I should say it’s interesting to me which is that there are a lot of different ways to skin the cat so I’ll give you a few examples most people just think of buying art that you think is going to appreciate will appreciate and holding it that’s an equity play right so that’s a very viable strategy and very interesting but then I’ve also been really actively involved in lending money against art because for the most part the traditional banking landscape does not lend money secured by artists collateral so I found out that there are a lot of people with enormous wealth and great balance sheets and P&Ls who may have been cashflow strapped but they had eight million dollars of paintings in their house and they wanted to put three million dollars of a deposit down on a real estate project for their next deal you know and so they needed short-term cash and I found that believe it or not there are a lot of people that had that particular need they wanted to securitize their art borrow against it those have been great types of investments because they’re willing to pay points and they’re willing to pay high interest rates for a short period of time so that that’s been interesting and you know we do it in a way that’s very secure in terms of loan-to-value coverage but what’s interesting is that when you hold yourself out to the world as being a lender against art you actually unearth a lot of people who want to sell you know they always say that there are three DS death divorce and debt that cause people to sell artwork and I’m sure that’s true of lots of things lots of assets but you know very frequently I’d be in the in the in a dialogue with somebody about lending against their individual art or art collection and they’d say well you know I’m really looking to sell I really want to monetize this which basically creates an investment opportunity from a distressed perspective so you know there are lots of different wrinkles of this thing and then the other part is just being in the gallery business itself I actually was part of a group that bought a an art gallery and it was distressed and we were able to turn the thing around and liquidate the inventory so that was another one.
Alan: Jim in the first segment we were talking about art as an investment a fairly broad term but I’ve noticed this trend of people that are concerned about currency what’s happening in the financial markets are looking for hard assets, how well have these pieces of art been doing?
Jim: Well you know as I said there’s an investment landscape of investable artists that that probably numbers quite small in fact maybe a couple of hundred investable artists worldwide it’s not to say that people don’t speculate on a broader group but that’s really the what you would call blue chip group and amongst that group you’ve seen people start to come in and looking to deploy capital as diversification away from their operating business their currency risk their whatever it might be and they’re looking to art as a way to as you say you know deliver a hard asset exposure that’s going to not be correlated at all to their traditional investments and what we’ve seen is that these blue chips artists have performed far better than the S&P 500 far better than any fixed income instrument and really performing on a par with private equity investments which are you know historically thought of as the highest returning investment strategy you know when I look at the appreciation that’s happened in the past ten years 20 years 30 years 40 years we’re talking exponential growth and we’re talking about annual rates of return and among these blue chip artists that are probably mid teams to over 20% annual rates of return so the returns are really there but like everything you know you have to be well counseled on how to identify those investments and then be able to implement the strategy in a cost-effective way.
Alan: You know it’s brilliant moving into this area of art but also the lending because you flesh out people who may want to just sell you know with it. Do you do you help individuals family offices to say hey Jim you know help me go find a good buy at barnyard fine yeah that’s something you’ll do for them?
Jim: It’s interesting I actually do exactly that you know I’ve got a lot of family offices that I’ve worked with some for you know 20 years who asked me to participate in on deals that I come across and as I said it might be buying an artist it might be buying a portfolio of artwork we’ve made bids on several large corporate collections actually that we’re in distressed around 2010 we’ve also looked at the lending business which people love because a lot of my family offices understand fine art and so they’re very comfortable lending against that asset particularly for looking at mid teen rates or returns and then the distress situation when we when we find somebody that’s really a stressed seller we’re looking for really big rates of return and that’s proven super enticing and so they’re they’ve all been interesting strategies.
Alan: I’m just curious so your dad was he was an artist and self-created works in your home?
Jim: Yeah you know he was an artist who was really a sculptor and he was self-taught and he got very passionate about other self-taught artists I’m originally from Tennessee so we grew up around a lot of southern folk art self-taught African American art in particular and so he started collecting this stuff like mad and he unfortunately died about four years ago and I inherited his collection and it was about 2,400 pieces of the outsider folk art and it’s been really fun seeing his passion and helping find homes for that stuff I gave all his research papers to the Smithsonian to the archive of American art and it’s been it’s been a nice way of looking in a different approach to the art world than the one that I’ve really espoused.
Alan: I want to take an angle a lot of people in this category who invests into art are always looking at hey give me some tax angles and I’m getting killed by a nickel Sam right now right and so how would you address that?
Jim: Well you know I would say generally most of the families that I work with that are large-scale art collectors or even those they’re building collections of art you know they’re all concerned about maximizing the efficiency of their investment so you know there are people that need tax deductions obviously and there are a number of different structures and strategies that can be used so that in the process of you know purchasing art it could be done in a way that creates tax advantages maybe donation of artwork to a privately held family foundation maybe working with an institution where you give annually partial gifts and artwork so for instance say somebody needs to have a million…
Alan: How do you give a partial gift?
Jim: It’s a very commonplace thing in the museum world so it’s just you assign a percentage interest in the artwork as a promised gift so for instance let’s say you want to shelter a million dollars of income a year somebody buys a five million dollar painting and then they split that up over the course of time and they give twenty percent every single year to this institution so they’re able to control the timing of that donation and it’s tax implications so there are lots of tools family foundations charitable lead annuity trusts charitable lead remainder trusts you know these are instruments that are created by trusts and estate attorneys with tax counsel involved and they look at the family’s full set of circumstances the other thing in addition to working with the foundation are working with the museum and doing partial gifts is that there’s also a whole set of opportunities to pass wealth down through your to your heir using artwork because art is like real estate maybe it’s even better for these purposes than real estate and what I mean is that it’s an ill-liquid asset class it has a limited market things when they to be forced into liquidation traded steeper discounts so all of those characteristics added up means that you could take an individual piece of artwork or you could put a collection into a partnership or an LLC and I could give members of my family interest in that LLC interests in that limited partnership I could give it to them at a discounted value because of the limited liquidity if you have to sell with short notice and I could also do it with an overlay of additional discounts because you’re gifting minority interests etc so the net-net of this is that art has actually been not only a great asset class in terms of investment performance it’s also been a really helpful tool in terms of families marrying their philanthropic and their tax strategies tax mitigation strategies and then finally to pass wealth it’s also a great asset because of its limited liquidity and you know smaller market sizes and the ability to take steep discounts on partnerships and family entities that hold the artwork so there’s a lot to do.
Jim: There’s a lot of little special nuances in the in the field of donating artwork for example can an artist just donate their own paintings and take these great write offs
Jim: No, it used to be the case I think that that could happen but that’s that game is over you know there are it’s not rocket science you know I mean there there’s a fairly well drawed path of the process that one has to go through for assessing value for the and how it is appraised and then calculating discounts that would be appropriate and then also looking at when in the timing of how you would actually make the donations but there’s nothing really Byzantine about it you know it’s a prade path but it’s really not used by that many people and you know I sort of feel like a lot of people if they were to understand the different ways that they could mitigate their tax exposure or if they could you know create new entities to pass wealth on to their family members I think they’d see a lot of interesting attributes to investing in our separate uh apart from its diversification and rates of return.
Alan: You know it’s interesting because when you look at the field of how much wealth is tied up in art and this stuff just sits on the walls of these individuals and no one cares who owns if they just walk by to enjoy it I I think it’s brilliant when you’re walking family offices through you know hey how do we cash in take an tax and go here or at least you know make it so that we can kind of make things more tax efficient.
Alan: Well you know not only tax efficient but like let’s say one is building a quote unquote investment portfolio an artwork you know you’re going to have costs of whether it’s storage or display cause it’s got to be cared for properly framed properly ship properly it’s got to be insured properly so there are there are costs just like investing in a money manager you know who charges management fees but all of those costs still netted against the performance are you know produce really attractive returns the way in which I think about investing in artwork without liquidity is that from time to time there are opportunities to there are opportunities from time to time to lend the artwork or rent the artwork so increasingly there are companies out there that will create a you know a corporate art collection and they’ll rent from you your artwork and so this asset class that’s historically been viewed as a liquid all of a sudden starts to have a rent a royalty and so that’s increasingly changing the way people think about buying art as well because if I can buy it and I don’t have terribly high quote management expenses involved and I can also generate some income while it’s also creating you know a set of tax advantages or gifting advantages starts to look pretty compelling.
Alan: Jim you do a lot of speaking before family office conferences, how does the person go about contacting you to work with you?
Jim: Well they can just email me my email address is Jim@hedges.company not com but dot company so Jim@hedges.company and you know I’m happy to visit with people about this I have an entity called hedges projects which is my investment advisory business and I have an entity called hedges projects which is actually my art business so you can google both of those and find out what I’m up to.
Alan: When you’re working with these families how do you help them understanding the value in what they’re investing in?
Jim: Well so there are a few different ways to approach this as I said earlier you know you can you can buy the equity of art you can purchase a work of art you can also lend against art and create a fixed income type of security on theirs buying distressed art which is also buying the equity but when I think about and what most people are most comfortable with is just simply the notion of buying art buying the equity of art and when I think about that I look across this universe of a couple of hundred investable artists and I’m very interested in how their artwork is valued relative to the peer group no different than any other security selection process so for instance I’ve invested a lot over the years and the work of an artist two German artists called Sigma or Polka who was a peer of a guy called Gerhard Richter to the greatest post-war artists from Germany well the disparity in value between these two peers was five to one it was an enormous disparity so it’s clear that there was a fundamental value play in the work of Sigma or polka relative to gerhard richter i also like to look at artists entire body of work see people paint they make sculptures they make photographs they make a whole array of different types of artistic output and so what I’ve found very frequently and the best example is with Andy Warhol I got introduced to Andy Warhol’s photographs about 20 years ago and started buying them and then started investing extremely heavily in them to the degree that now I’m said to be have the largest private collection of Warhol photographs out there and I’ve certainly probably bought and sold more Warhol photographs than anybody out there now the reason why I got excited about this is because obviously we know that Andy Warhol is sort of one of the blue-chip contemporary artists we know that his paintings sell for tens or hundreds of millions of dollars we also know that he made lots of prints now when he made a print he usually published 250 of those things but Andy Warhol used photographs in every single aspect of his art making process a painting that he made started off as a photographic study a print that he made started off as a photograph study similarly drawings were often photographed at the inception so the photograph for Warhol was this source material and the source material is a unique object it’s not like the prints where they made 250 of every one this is a unique individual object so theoretically it should be valued at a much higher price than something of which there are 250 in the world so I started collecting these Warhol photographs and have been very excited to see the appreciation in them but there’s still enormous ongoing upside in in that so as I said I like to look at artists relative to one another from a value perspective I like to look at an artist body of work and see are there sweet spots that that are really great investment opportunities and then of course you know there is the more speculative because the art world like private equity investing is a relationship-driven world and there are times where you’re able to identify a confluence of influences and momentum and attention around artists that you can say that guys go in someplace you know or she’s got a huge career ahead of her and you can see who’s paying attention and that also can present really great opportunities.
Alan: I’ve been visiting here today with Jim hedges Jim for more information how’s the person go about reaching you?
Jim: Best way is to pick up the phone and call me I’ve got a cell phone at 212-671-0522 or you can email me at Jim@hedges.company and that’s those are the two fastest ways