How Financial Funds Work

Investment funds are one of the main tools for multiplying money around the world. Investing in bank deposits is now unprofitable: in the developed countries, there is a minimum return on them, sometimes even negative, while in developing countries, where the return is higher, there are much greater risks. Endowment insurance is a fairly conservative tool that provides insurance protection and brings a small profit. Pension funds make it possible to gradually accumulate funds for the investor to collect a certain amount of money for retirement.

Investment funds or collective investment institutions (CII) are the ones to make money work. They also provide opportunities for such investments, which would be quite problematic to do on one's own with small amounts of investments. In addition, the investment fund finances are managed by professional investors, which gives hope for effective investment and, as a result, the high profitability of the investments. Investment funds have a great advantage: they pay income tax only once, after exiting the investment.

When creating an investment fund, its founders attract private investors. In the founding documents of the fund there are indicated requirements to the size of contribution: a minimum or, on the contrary, a maximum contribution amount can be set. Sometimes, however, investment funds are created for a specific pool of investors to finance a specific project. Most often, this approach is used to manage big private capital.

Traditionally, funds can be open, interval and closed ones. In open funds, investors can invest at any stage of its existence, or, for example, if the investor is satisfied with the results of the fund operation in recent years. Exit from such fund is also possible at any time. In the interval funds, it can be done in well-defined periods: once a year, twice a year, once a quarter, once a month (details are specified in the fund’s strategy at the time of its creation). Exit from the closed fund is possible only after its expiry. It is usually three to five years, rarely seven years.

Asset managers either invest attracted funds in various instruments: shares, bonds, bank deposits, precious metals, real estate, or use them to finance business projects. Proportions of investments depend on the fund’s investment strategy. For example, a more risky strategy involves investing in shares, which are high-risk instruments. The share of securities in the portfolios of these funds can reach up to 100%. The risks are great: success depends on the “intuition” of the asset manager. The task of the manager is to determine the risks of certain issuers, to minimize them and to bring profit to investors.

More conservative investors prefer moderate investment policy. In this situation, a part of the funds is invested in fixed income instruments: state, municipal or corporate bonds, bank deposits, precious metals. The higher the proportion of these instruments in the fund’s portfolio, the more conservative its investment policy is considered.

Prospective investors should be reminded: the higher the risk, the higher the potential return. Preferring more risky funds, they are able to earn more. However, the risk of losing a part of investments in such a situation is also higher.

Venture funds represent a separate category of funds. The funds are invested in risky projects, such as start-ups. These funds are suitable for reckless investors: investments can bring a profit of a hundred per cent, or large-scale losses. It has a logical explanation: in the common practice in the world, only one start-up out of 10 is successful.

The fund can invest in new business at various stages of its development. For example, it may be an investment in a viable idea (a “seed” stage). At this point, the idea of the project is developed, its authors are monitoring the market, make a business plan, create a prototype of a product or service. If at this stage authors manage to find an investor, the start-up develops further. If they do not find an investor, the project “dies”. Investments at this stage can be the most profitable, if the business idea turns out to be successful.

It is possible to find such a business idea in the so-called business incubators and accelerators, which provide assistance to start-ups. They help authors of ideas to learn basic business skills, offer training and workshops, provide room to work, help in the preparation of presentations for investors, as well as render a range of non-core services for a start-up on conditions of outsourcing (translators, accountants, lawyers, etc.). In such incubators, all start-ups undergo primary selection: to get into the business incubator, the project must be viable, and its owners must have the desire and the ability to develop it.

It is possible to invest in a start-up at the stage of its launch, when the product or service enters the market, and in the period of growth and expansion. Usually, by this time, the project has demonstrated its viability, and the resource for further development has been exhausted, so its creators have to seek investors.

After the business goes to deep waters, a venture capital fund can fix profits by selling a portion of the business to its owners or to strategic investors. As a rule, life cycle of a venture fund is about 10 years. But there may be open-ended funds, where funds received in the form of profits from projects are invested in new business ideas.

Ignas Jurkonis

Art Market Chess Pieces--
Organisation of the world art market could be compared to chess upon the condition that bishops could pretend to be rooks, knights could pretend to be queens and pawns could change colour whenever they would like. Chess pieces involved in the artistic processes play the roles assigned to them by the market, while trying to win over the functions of the other pieces. Thus, a collector becomes a dealer, an artist becomes an art consultant, and an art critic becomes a curator. But let’s start with the pawns who dream of working their way out to becoming a queen.
1. Artists
More than 50 thousand artists reside in New York and London. According to evaluations of the year before the last, only 75 of them earn more than a million dollars per year. All the others work to the best of their talent and for much more modest compensations.
Only unknown artists, or, on the opposite, very well-known ones sell their works independently (as Damien Hirst did in 2008, putting up for sale, bypassing his dealer, more than 200 works). The usual practice for an artist is to sell his/her works with the help of a dealer (gallery). The artist and the dealer conclude a contract, under which the artist commits to work with the dealer, and the dealer commits to represent the interests of the artist on the market. Since that moment, the dealer looks for buyers, organises exhibitions, and prints catalogues. The more authoritative the gallery is, the more customers trust the new name. Even though it’s unbecoming, but it often happens that the artist switches the dealer who discovered his/her name to the world, to a bigger dealer, who offers better conditions and richer customers. So, in 2006, Takashi Murakami went to Larry Gagosian, leaving Marianne Boesky, who, in fact, made him a star.
2. Dealers
The mentioned Larry Gagosian is the first who is recalled when hearing the word combination “art-dealer”. He is the owner of 13 galleries on three continents, representing the interests of about eighty artists with millions of revenue. He represents the predatory nature of the art market. There are not many art dealers in the world, working on such a large scale. “Not many” is actually six: Zwirner, Hauser & Wirth, Pace, White Cube galleries, as well as Nahmad and Mugrabi families. Only auction houses are players larger than them. Overall, it is believed that there are about 300 thousand art dealers on the market, of which 90% are small galleries with an annual turnover of less than 1.5 million US dollars.
The larger gallery is, the harder it is for a man from the street to buy the work of a supervised artist. The issue of money is not important here, as it is understandable that you would not have come here without money. But galleries make sure that the works of one artist are distributed evenly around the world, to prevent too many works to be accumulated in the hands of one person, or even in one city. The buyers are often asked to sign an agreement before purchasing not to resell the work within a certain period. And even if in terms of the law the importance of such a piece of paper is zero, once you break the terms of the deal, you will never be able to buy from this gallery again. The world of art sales is based on personal contacts, and this information is distributed instantly. Therefore, if you want to make things right, please refer to an art consultant.
3. Art Consultants
People say that before the end of the XX century the global contemporary art market was so small that sellers knew in person all buyers able to spend more than 5 million US dollars on an artwork. There were about a hundred of them. Now there are more than a thousand such customers, and some of them just some time ago did not know anything about contemporary art. There was a famous story of the purchase of “Dora Maar with Cat” painting by Picasso at Sotheby’s in New York in May 2006, when an unknown man won the auction and paid 95.2 million US dollars for it. Later it became known that it was the first serious art purchase of Georgian billionaire Bidzina Ivanishvili.
Nowadays the passion for contemporary art for a rich man is already considered as something essential, like golf skills. Inviting an art consultant, a person usually puts in front of him/her several tasks: to advise and to teach, as well as to monitor the art market in search of suitable works for the collection. Art consultants visit art fairs and exhibitions, where the customer cannot go due to a lack of time, use established contacts with art dealers to obtain the work of the desired artist, and introduce the client into the small circle of initiates. For such work, he/she received compensation and/or a specified percentage from the purchases. It is interesting that only the names of collectors remain in history as a result. Everyone, I think, are aware of Russian patron Ivan Morozov, whose collection has long been a part of the Hermitage exhibition, but how many people have heard of his art adviser Ambroise Vollard?
4. Museums
Currently, there are slightly more than 200 institutions, which may be called Museums of Modern Art. Some of them are state-owned, other are private. There is even a neologism to describe a museum, open to private collectors: egoseum.
Once museums were the main arbitrators in the art world. Artists admitted to the exhibition at a museum, were considered to have passed the exam and their works to be fit for collecting. Expert assessments of museum curators decided whether an artist could engage in the art, or he/she should think about changing profession. Since then, things have changed somewhat. The art world has found new heroes — those who are willing to offer more money. There is already a lot of very popular artists, who did not pass a mandatory procedure of “approval by exhibition”. They sell their works well without exhibitions. Budgets and state museum funds can no longer compete with the resources of wealthy collectors, auction houses, and leading galleries. Therefore, curators and directors of important museums are increasingly leaving for private institutions, join the ranks of art consultants and international curators. Their incomes are growing, and the market receives professionals of the highest level.
5. Curators
Institute of curatorship has changed a lot in the XXI century. On the one hand, art consultants call themselves curators too. On the other hand, “super-curators” appeared who can impose their will both on customers and on artists. People like Paul Schimmel, Massimiliano Gioni, Hans-Ulrich Obrist are curators of planetary scale, capable of creating exhibitions, carrying the Idea. The concept of curators, bound for life to a single museum, is no longer relevant. However, the critics of “super-curators” complain that their names sometimes overshadow the names of the artists involved in the exhibition. It has already happened more than once with the pavilions of the Venice Biennale.
6. Auctions
There are, according to various estimates, from one and a half to four and a half thousand auctions in the world, which sell artwork. And even people who are far from art know the names of the two main ones: Sotheby’s and Christie’s. They account for 80% of sales of the most expensive works of art in the world. Sotheby’s and Christie’s are companies with multi-billion turnover and all the necessary features of luxury-brands: history, exceptional service, elitism and exclusivity.
Auctions are the natural enemies of art galleries. Once strict rules acted in the wild world of art sales: auctions traded on the secondary market, galleries were active on the primary market, and even large collections were given to galleries for sale, as auctions were not prestigious enough. Everything has changed in the era of globalization. Auctions turned out to be better prepared to attracting new customers in emerging markets in Asia than dealers. Auctions already had their offices in India, China and Russia, as well as the army of employees who were able to convince the “new richmen”.
In 2004, for the first time in the history of auctions, the value of artwork of contemporary artists, sold in one night, reached more than USD 100 million. Francis Outred, the head of the sales department of contemporary at Christie’s, said in an interview to Financial Times that within his lifetime he would see how the work of art will be sold at an auction for USD 1 billion.
Modern auctioneers are earning not only at auctions. Their activities are much more diverse. Now they often serve as art dealers, selling works directly to customers without public auction (it is called private sales), as creditors by lending money to collectors against future sales (as was the case with the collection of Elizabeth Taylor), and even try to open galleries. However, the latter has been unsuccessful so far: when Christie’s bought the respected London gallery Haunch of Venison in 2007, art dealers interpreted this move as an aggressive intervention in their territory, and several artists who cooperated with the gallery, broke their contacts with it. They made it clear for Christie’s: you are intermediaries between the seller and the buyer, and do not dare to go further than that.
7. Art Fairs
Art fair is the answer of art dealers to auctions, the opportunity to collect their scattered forces in one place at one time and to attract spoiled buyers with this variety. If you are rich but busy man, you definitely do not have time to travel around the galleries of the world, but by dedicating one day to visit the art fair of Art Basel, Frieze and Armory Show scale, you get a unique opportunity to see all the interesting and worthy of attention artwork in one place, to compare prices, to get to know the right people, to walk with your art consultant. Here you will meet representatives of all the major auctions, struggling to take the most interesting buyers from art fairs to their territory (usually all the best restaurants in the city are booked just for such operations on these days).
8. Art Critics
Dave Hickey, who is known by the nickname “The Enfant Terrible Of Art Criticism” caustically remarked: “Art editors and critics have turned to court nobility. Everything we do is strolling through the palace and giving advice to very rich people.” Of course, it is a joke, but with a share of truth — it is difficult to remain independent and impartial, surrounded by the people who buy and sell works of art for astronomical sums of money in comparison with the income of a journalist. So, it became rather ordinary to see the transformation of an art critic into an art consultant or a curator.
9. Collectors
They are very moody and demanding people. I know it from my own example. They want everything at once. But I think that people of another character cannot win in our game.
Ignas Jurkonis