Is Masterworks a Scam or a Real Way to Invest in Art?

Masterworks has garnered considerable attention as a novel investment platform that allows individuals to gain exposure to the contemporary art market. However, like any investment opportunity, there are significant risks involved. Here, we examine whether Masterworks is a genuine investment option or a potential scam.

Legitimacy and Risk Management

Research into Masterworks suggests that it is indeed a legitimate business that offers a unique way to invest in art for a wide range of investors. Open to individuals in the UK and several other countries, Masterworks provides a platform to acquire shares in major artworks privately, bypassing the traditional auction system with its high spreads and fees.

One of the key advantages of Masterworks is that it often buys and sells artwork privately, which can be done at lower commission rates compared to auctions. Furthermore, any individual paintings are wrapped in Special Purpose Vehicles (SPVs), separate legal entities that protect investors. This means that in the event of Masterworks collapsing, investors stand a good chance of recovering their share of the artwork's value at the time of the collapse.

Investment Upsides and Downsides

Investing in Masterworks is not without risk. The potential upside is that investors can expect around 15-20% annualized returns after fees and commissions. However, the downsides are substantial, particularly in the realm of risk management.

Firstly, the contemporary art market is inherently risky, with many works being perceived as merely decorative or valuable due to the reputation of the artist. Moreover, some paintings may not have any intrinsic value outside of their perceived cultural importance, and this value can fluctuate based on changing trends and cultural perceptions.

Secondly, the liquidity of investments through Masterworks is another concern. While a secondary market is offered, it may be relatively illiquid. This means that you could wait up to 10 years before seeing your investment pay off, with your artwork safely stored in a vault in Delaware.

Subjectivity and Subjective Value

One of the most challenging aspects of investing in art is its subjective nature. Unlike other investment instruments, art's value is largely based on cultural perception and lacks an objective measure. While major art pieces have appreciated significantly in recent decades, there is no intrinsic value supporting these investment options beyond cultural recognition.

This subjectivity can lead to significant risk, especially in a new and emerging investment platform like Masterworks. The company is relatively new, and there is less established understanding of what constitutes good or bad management of art investments. Without clear objective criteria, it can be difficult to determine the wisdom of the investments Masterworks is making.

Final Thoughts: Is Art a Good Investment Option?

For most individuals, investing in art is not a prudent idea unless it is a very small portion of a diversified portfolio. Diversifying beyond the SP 500 and domestic bonds, consider foreign stock markets, real-estate trusts, and other investments that offer more objective value and liquidity.

While Masterworks provides an exciting opportunity to enter the art market, it is crucial to approach it with caution. Always conduct thorough due diligence and seek professional advice before making any investment decisions.