Pi-eX CFS are a Sustainable Answer to Volatility in the Fine Art Market

Volatility issue in the fine art market:

While many see the Fine art market as stable, anyone who has purchased an artwork and, then a few years later, looked to sell the same work will likely have seen, at first hand, that, on many occasions, this is not the case thus highlighting the level of risk. In particular, art sellers can never know, ahead of time, if they will be able to sell the artwork at a premium to their purchase price, or, in some cases, sell the work at any price given the fluctuations in liquidity. While some sellers do achieve amazing returns on their art investments, many others do not.

In 2018 less than 50% of artworks auctioned at impressionist evening sales at Christie's and Sotheby's achieved Hammer Prices above their Low Estimates listed in the auction houses' catalogues.

At the same time, almost 50% of the works sold at the same auctions did not obtain Hammer Prices at least equal to the Low Estimates listed in the auction houses' catalogues, a worsening situation versus the average of the past 3 or the past 10 years.

Within this group of rather unhappy sellers, more than 20% did not even managed to obtain hammer prices in excess of the Reserve Prices. As a result, those sellers returned home with their artworks unable to liquidate their art investments. These were clearly very unhappy sellers!

Current art market answer:

To persuade sellers concerned by the volatility of the art market to consign artworks to auction, the auction houses, long ago, developed a system of guarantees. In return for the consignment of works to auction, the auction houses offer art sellers a guaranteed selling price for their artwork..

If the auction houses decide that the level of financial risk generated by the guarantees is too great for them to bear alone, the auction houses may then invite third parties to commit to buy the guaranteed artwork for an agreed minimum price ahead of the auction. This is called a Third Party Guarantee or an Irrevocable Bid.

While providing a welcome hedge for artwork sellers, the Guarantees and Irrevocable Bids system created by the auction houses suffers from the following shortcomings:

1. The system lacks transparency

2. The prices set by the Guarantees and Irrevocable Bids do not reflect market prices but rather the agreement of a small group of insiders

3. Guarantees and Irrevocable Bids only push the risk down the art market value chain; they do not spread and diversify the risk across multiple parties

Pi-eX innovative solution:

Pi-eX Contract on Future Sales (CFS) are an innovative answer to the issue of volatility in the art market. Art sellers can use the power of CFS to hedge part of the risk they are facing when commissioning artworks at an auction house, while eligible investors can take a speculative short term position in the fine art market without having to own artworks.

In addition to providing a new welcome hedge to art sellers, Pi-eX CFS boost the following pluses:

1. the issuance, trading and clearing of CFS are completely transparent and all financial transactions are monitored and reported as they would be for any other regulated derivative instrument.

2. CFS pricing is market driven via a process of public offering and book building.

3. Pi-eX CFS create a true hedge for the art market volatility risk by splitting the risk in many small standard financial contracts and allowing a new set of investors (eligible and institutional investors) to share part of the risk in exchange for a share of the potential upside.

Pi-eX CFS provide value both for:
  • art sellers who want to hedge the volatility risk of a particular upcoming sale and

  • investors who want to take a position in the art market but are concerned about holding high ticket items for a long time and the diificulty to diversify their risk.
offering for ART SELLERS offering for INVESTORS
As a broker dealer, Pi-eX helps art sellers and auction houses to market and issue CFS based on specific artworks that sellers intend to sell.

For CFS to be arranged, the following conditions need to exist:

  • the artwork needs to have a low estimate of at least 500,000 GBP

  • the art owner needs to agree or plan to agree to sell the artwork at an auction house in an upcoming sale.

  • all authenticity and provenance documents for the artwork need to be available
As a broker dealer, Pi-eX offers eligible investors financial instruments providing an exposure to the fine art market.

For investors to be eligible they need to be:

  • a professional client

  • an eligible counterparty

Please note that Pi-eX is not authorized to sell CFS to retail clients.
If you are planning to sell artworks and are interested in hedging your upcoming sale, please contact Pi-eX at collector@pi-ex.co If you are an eligible investor and are interested in Pi-eX CFS, please contact Pi-eX at investor@pi-ex.co
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