Art As An Investment

Transcript

Alan Olsen: [00:00:00] Welcome back. I’m here today with Jim hedges. Welcome.

Jim Hedges: [00:00:03] Thanks so much for having me.

Alan Olsen: [00:00:05] Jim, for the guests. Can you give us the background of what inspired you to do what you’re doing today?

Jim Hedges: [00:00:11] Sure. Well, I started off in the alternative investment landscape when I was very, 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 eighties and nineties, really deliver outperformance.

So I started a firm to advise high net worth individuals and wealthy families on investing in hedge funds. And we ran fund-to-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 in the hedge fund and private equity landscape into investment programs.

So along the way, I had I 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 it’s art, design, antiques, whatever.  I had a lot of background. My dad was an artist, actually, my mother’s a designer. So I, I came by this interest in art naturally. And then what I found is that art was actually the super interesting investment opportunity that 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 doing the same thing over here in the art landscape. And I’m very involved in that to this day. So it’s been a nice arc going from these two sides of the alternative investment sector.

Alan Olsen: [00:02:20] When you’re moving into, or looking at the value of a painting or  first of all, let me clarify in the world of art it’s a very broad term. Can you define more what type of art?

Jim Hedges: [00:02:33] 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 investible. You know, if you look at the big name modern and contemporary artists of mostly the 20th century. you’re going to find a lot of investment grade artists that represent interesting opportunities. I sort of viewed 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 how much volume is there with the artist, what are the market prospects, what’s the relative value 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 Olsen: [00:03:37] Do you do a lot of shows then when you’re selecting or do you have a specialty to say I’m going to only look for this artist and work on a portfolio

Jim Hedges: [00:03:49] No, that’s what’s really interesting about it 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 art as collateral. So I found out that there are a lot of people with enormous wealth and great balance sheets and P and L’s who may have been cashflow strapped.

But they had $8 million of paintings in their house and they wanted to put $3 million 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, very secure in terms of loan devalue 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 D’s – 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 few frequently I’d be 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 the business itself. I actually was part of a group that bought 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 Olsen: [00:06:06] Jim, I need to take a quick break. I’m visited here today, Jim hedges. And, after we get back, I’m going to and move further into currently this alternative investment world. We’ll be right back after these messages.

Welcome back I’m visiting here today with Jim hedges and Jim in the first segment we were talking about art as an investment. A fairly broad term, but I I’ve noticed this brand 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 Hedges: [00:07:14] Well, you know, as I said, there’s an investment landscape of investible artists,  that probably numbers quite small. In fact, maybe a couple of hundred investible 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 risks, 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 and 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 10 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 teens 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 Olsen: [00:08:48] You know, it’s brilliant moving into this area of art, but also the lending, because you flush out people who may want to just sell.

Jim Hedges: [00:08:57] Yeah.

Alan Olsen: [00:08:58] So, do you help individuals, family offices to say, Hey, Jim, you know, help me go find a good barnyard find. That’s something you’ll do for them?

Jim Hedges: [00:09:08] 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 invite them to participate 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 were in distress 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 we’re looking at mid teen rates of returns.

And then the distress situation. 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, so they’ve all been interesting strategies.

Alan Olsen: [00:10:04] Yeah, I’m just curious, so your dad, he was an artist and self-created works in your home?

Jim Hedges: [00:10:11] Yeah, you know, he was an artist who was really a sculptor, and he was self-taught and he got very, 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 outsider folk art. And, and it’s been really fun seeing his passion and helping find homes for that stuff. I gave all this research papers to the Smithsonian, to the archive of American art. And, it’s been a nice way of looking at a different approach to the art world than the one that I’ve really espoused.

Alan Olsen: [00:11:02] I want to take an angle. A lot of people in this category who invest in the art are always looking at, Hey, give me some tax angles. I’m getting killed by uncle Sam right now.

Jim Hedges: [00:11:13] Right.

Alan Olsen: [00:11:14] And so how would you address that?

Jim Hedges: [00:11:16] Well, you know, I would say generally most of the families that I work with that are large scale art collectors, or even those that are 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 of a million.

Alan Olsen: [00:12:03] How did he give a partial gift?

Jim Hedges: [00:12:04] Yeah, it’s a very commonplace thing in the museum world. So it’s just, you assign a percentage interest, in the artwork as a promise gift.

So for instance, let’s say you want to shelter a million dollars of income a year. Somebody buys a $5 million painting, and then they split that up over the course of time and they give 20% every single year to this institution. So they’re able to control the timing of that donation and its 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 trust 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 a foundation or working with the museum and doing partial gifts, is that there’s also a whole set of opportunities to pass wealth down to your heirs 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 illiquid 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, with short notice. And I could also do it with an overlay of additional discounts because you’re gifting, minority interests, et cetera.

So the 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 and 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, steep discounts on partnerships and family entities that hold the artwork.

So there’s a lot to do

Alan Olsen: [00:14:33] Now there’s a lot of little special nuances in the field of donating artwork. For example, can an artist just donate their own paintings and take these great

write-offs?

Jim Hedges: [00:14:45] No. It used to be the case. I think that that could happen, but that game is over.

You know, it’s not rocket science. You know, there is a fairly well-trod path of the process that one has to go through, for assessing value  and how it is appraised and then calculating discounts that would be appropriate. And then also looking at the timing of how you would actually make the donations.

But there’s nothing really, Byzantine about it. You know, it’s a well-trod 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 onto their family members, I think they’d see a lot of interesting attributes to investing in art separate and apart from its diversification and rates of return.

Alan Olsen: [00:15:44] You know, it’s interesting because when you look at the field of how much wealth is tied up in art, and the stuff just sits on the walls of these individuals and nobody cares who owns it. They just walk by to enjoy it. I think it’s brilliant. When you’re walking family offices through, you know, Hey, how do we cash in and take a tax angle here, or at least make it so that we can kind of make things more tax efficient?

Jim Hedges: [00:16:10] Well, you know, not only tax efficient, but like let’s say one is building a  “investment portfolio” artwork. You know, you’re going to have costs of whether it’s storage or display costs, it’s gotta be cared for properly, framed properly, shipped properly, it’s gotta be insured properly. So 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 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 illiquid, 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 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 Olsen: [00:17:38] So, Jim, you do a lot of speaking before family office conferences.

Jim Hedges: [00:17:42] I do, yeah.

Alan Olsen: [00:17:42] How does the person go about contacting you to work with you on art?

Jim Hedges: [00:17:46] Oh gosh. Well, they, they can just email me. My, my email address is jim@hedges.company, not.com but .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. Yeah.

Alan Olsen: [00:18:11] When you’re working with these families, how do you help them understand the value in what they’re investing in?

Jim Hedges: [00:18:20] Well, so there are a few different ways to approach this.

As I said earlier, you know, 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. There’s 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 investible artists. And I’m very interested in how their artwork is valued relative to do 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, a German artist called Sigmar Polke, who was a peer of a guy called Gerhard Richter – two of the greatest postwar artists from Germany.

Well, the disparity in value between these two peers was five-to-one. It was an enormous, enormous disparity. So it was clear that there was a fundamental value play in the work of Sigmar Polke relative to Gerhard Richter. I also like to look at artist’s 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 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 photo graph 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 everyone. 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 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’s body of work and see are there sweet spots 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 guy is going 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 Olsen: [00:21:52] I’ve been visiting here today with Jim hedges. Jim, for more information, how’s the person go about reaching you?

Jim Hedges: [00:21:57] 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!

Alan Olsen: [00:22:10] I appreciate you being with us today.

Jim Hedges: [00:22:11] Thank you.

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 a 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 Madoff 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 hedges iv, 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 investment consultant, 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 Jim hedges Los Angeles chapter.
Bio sourced: www.hedges.company

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