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by Charlie Finch
With another contemporary art auction cycle upon us, naive observers are again wondering about the huge prices engendered by hedge-fund speculation in contemporary art. How exactly is it done?

The answer lies in a practice initiated by hedge funds, for reporting purposes, at the end of each fiscal quarter. The practice is called, appropriately enough, "painting the tape."

Let's say you own ten paintings (or stocks, or other financial instruments), worth around $20,000 each. If you buy the 11th one for an inflated price, say $100,000 for Painting X, it allows you to claim that value for each of the ten other paintings by Artist X in your portfolio, irregardless of the actual demand for said paintings in the so-called market.

Increased values for a basket of paintings by, say, Martin Kippenberger, or Richard Tuttle, or David Salle, create a financial instrument for borrowing purposes, slicing off a percentage as a fee for taking on risk, or using the art as an instrument for swapping shares in different funds.

The beauty part is that hedge behavior also has advantages on the downside, with losses offsetting gains in other speculations for tax purposes. With so much inflated value in contemporary, the time should come within five years or so, when a lot of this art will be dumped on the market for 40 cents on the dollar.

At that point, the traditional players, true connoisseurs and traditional galleries will be invited back in to play. But will they still be there, or will the contemporary market crash completely?

CHARLIE FINCH is co-author of Most Art Sucks: Five Years of Coagula (Smart Art Press).