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Guernsey Hosts First Ever Fine Art Hedge Fund

by Phillip Morton, Investors Offshore.com

15 October 2007


The world’s first ever genuine fine art hedge fund has been domiciled in Guernsey.

London-based Artistic Investment Advisers’ Art Trading Fund is a three-year closed ended Guernsey vehicle – a cell of Art Investment PCC Limited. It launched 1st August 2007 on the Channel Islands Stock Exchange (CISX) and is expected to close at the end this year having raised GBP25 million (US$50 million). The fund is regulated by the Guernsey Financial Services Commission (GFSC).

“We were looking for a jurisdiction that would provide us with both the security and yet flexibility to successfully establish and operate such an exotic fund and Guernsey, particularly with its strong yet fair approach to regulation and continued tradition of innovation, was the perfect match,” explained Chris Carlson, a Director of Artistic Investment Advisers.

“All the way through the process of structuring, establishing and launching the fund we have had constructive engagement with the Guernsey service providers and regulator and it is this positive approach and spirit of cooperation which has provided the foundations for the success of this fund," he added.

The Art Trading Fund is like a mutual fund, except that what it buys and sells is art instead of stocks. The investors – whether institutional or retail – are not necessarily collectors or aesthetes but simply want to diversify their investment portfolios.

What particularly distinguishes it from previous art funds is the Art Trading Fund’s strategy of buying put options (options to sell at a fixed price) on stocks that are believed to have a high correlation to the art market, such as Sotheby’s and luxury goods companies like Richemont. The idea of shorting these stocks is that, if the art market falls, these stocks will fall too, and the fund can turn these options into cash.

Peter Niven, Chief Executive of GuernseyFinance – the promotional agency for the Island’s finance industry, announced last week that: “To have the world’s first ever genuine fine art hedge fund domiciled in Guernsey is a real coup for the Island. It is a major endorsement of Guernsey’s funds environment and in doing so adds to the Island’s reputation as an excellent location not just for traditional funds but alternatives such as funds of hedge funds, private equity and property, as well as the more esoteric asset classes such as fine art.”

The Art Trading Fund buys and sells art via its global network of dealers, artists, auction houses and galleries. Usually works are kept for no longer than a year, with the fund focused on 3 to 12 month returns.

A significant part of the business is in the work of living artists, with a group of whom it has the exclusive right to buy their art; every six months, the fund’s partners look at each artist’s production and buy as many pieces as they want – what they don’t want, the artist can sell elsewhere. The artists are not necessarily household names but they have a track record and a following.

Sean Cheong, Partner at Collas Day Advocates, advised on the formation of the Art Trading Fund.

"Being the first fund of its kind, we had the opportunity to show how art could be made accessible to a wider investor base in a market previously dominated by a small and elite group of individuals and institutions. Investors are starting to show an increasing appetite for exotic asset classes and the success of the Art Trading Fund means that Guernsey could be invited to create solutions for other similar opportunities in the future," she said.

The value of funds under management and administration in Guernsey reached a record high of GBP155.6bn at the end of June 2007, an increase of GBP15.2bn (10.8%) over the previous quarter and GBP32.2bn (34.8%) year on year.

Niven concluded: “Guernsey’s funds industry is in a healthy position and we are very much looking to continue increasing our business flows during the remainder of 2007 and through 2008.”

A comprehensive report in our Intelligence Report series examining offshore investment, offshore stock exchanges, trusts and hedge funds is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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