Masterworks: A Data-Driven Approach to Identifying High-Yield Art Investments

Investing in fine art is a luxury reserved for the super-rich. That’s the general perception of the high-end market, and it’s somewhat true.

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Regular investors don’t have piles of liquid cash and therefore can’t afford museum-caliber paintings by Banksy, Warhol, Basquiat, and other acclaimed artists. Plus, they lack access to the exclusive world of art auctions and private sales.

Even if you managed the funds to purchase a multi-million dollar painting, how would you determine an artist’s investment potential? Is it wiser to invest in the works of established artists or up-and-coming names? Will all pieces by a given artist generate similar returns?

Such questions have dissuaded ordinary investors from dabbling with the blue-chip art world. Masterworks, a mobile-friendly art investment platform, overcomes this barrier with data-driven insights. 

The Masterworks app uses the fractional investment model to allow members to buy shares of museum-worthy paintings for as little as $20. Beyond affordability, it’s the clever use of data that has helped the platform attract a community of more than 811,000 members.

Building an Art Transaction Database

Art transactions, be they auctions or private sales, generate a plethora of data, some of these signals are available to the general public. However, the market lacks a standardized approach to accessing, consolidating, and utilizing this data. Regular investors like you and me can’t readily find auction catalogs. Even if we do, interpreting sales records to understand market dynamics can be difficult.

The Masterworks team recognized this gap and plunged into action. When they first got started, the company’s data collection specialists spent more than a year scouring auction catalogs from the last three decades. That, in turn, resulted in a robust database of art transaction data, which the team keeps updated on an ongoing basis.

Next came the challenge of establishing a price index for art. The team used the “repeat sales” approach to create a price index based on the analysis of tens of thousands of resells in the market. When you look at the sale prices of the same painting over time, it helps to create a more accurate picture of what’s happening.

“If we see an artwork sell for X at a certain date and then sell again Y at a later date, we can calculate its price appreciation,” explains Masterworks CFO Nigel Glenday, “and, even more, if we do this over tens of thousands of repeat sales we can create a price index that tells us something about how the art market appreciates as a whole.”

The database therefore also offers insights into the overall art market’s appreciation trajectory, as well as how different artist markets have performed historically.

Using Data to Power Art Acquisitions and Investments

With historical art sales data at their fingertips, the research team at Masterworks can easily identify artist markets with high investment potential. They don’t have to rely on their intuition or personal opinion about an artist’s work. Instead, they can look at what kind of returns an artist’s paintings have generated over time to determine whether they’re worth a shot.

The company’s acquisition specialists use these insights to select and purchase paintings through auctions or private deals. With a strict screening process in place, the company says that less than 5% of what’s on offer makes it through.

The use of data-driven insights helps the Masterworks team maintain objectivity when purchasing pieces. Also, it minimizes the risk of losses and gives art-world novices the confidence to invest in different pieces.

Moreover, the acquisition team uses predictive analytics tools to understand how different markets will perform in the future and identify emerging trends. It helps them identify undervalued pieces and up-and-coming artists with significant momentum for investing.

After purchasing a painting, Masterworks files an offering circular with the SEC to securitize it. This lets members on the platform buy fractional shares of the underlying artwork with a starting investment of $20.

Harnessing High-Value Exit Opportunities With Data

Typically, Masterworks holds a painting for three to ten years before selling it and paying out the profits to shareholders. However, returns can vary based on when a painting is sold. What does the company do to get the timing right? The answer, as you might have guessed, is data.

Acquisition and private sales specialists at Masterworks constantly monitor the high-end art market to understand demand and supply. The combination of first-hand insights and machine learning algorithms helps them stay abreast of changes in market dynamics and buyer preferences. That, in turn, allows them to identify high-yield exit opportunities.

But how well does the data-driven approach work? For starters, Masterworks paid out $25 million in returns to investors in 2022. Also, the 16 successful exits to date have generated 45% average annualized returns.

The use of data has even helped Masterworks harness short-term exit opportunities with high gains. Case in point – a Simone Leigh piece yielded a remarkable 325% annualized return after a holding period of 36 days. In another instance, a painting by Cecily Brown fetched a staggering 77.3% annualized return after a 259-day hold.

In both cases, Masterworks deviated from their usual holding period of three to ten years to capitalize on a high-return resell opportunity. Access to art market data and trends gave the team the confidence to do that.

A New Way to Invest in Fine Art

With the powerful combination of historical data and machine learning algorithms, Masterworks eliminates the mystery associated with the high-end art market. The company uses data-backed insights at every step, from acquisition to exit. That, in turn, takes the guesswork out of the process and paves the way for a more systematic art investing landscape.