The Art Investment Funds are a double-edged sword. There is much evidence pointing to the fact that these funds do not rise and fall with the equity market, and further are less prone to volatility. FAF founder, Phillip Hoffman states that a Canaletto will “never fall to zero”, however highlights the fact that stocks and bonds may fall to zero.
There are misconceptions about the degree to which art funds are safer than more mainstream investment funds. It is not the fact that art is a real asset that makes the fund safer than conventional products. The underlying art is what makes the fund safer. The difference between a Canaletto and the starving artist down the street is that the risk in paying $250,000 is far less for the Canaletto, despite the payoff being greater. The fund managers know exactly what they are doing. Often the managers have worked previously in finance and private equity. The funds are essentially private equity funds backed by art. The five to ten year horizon is interesting, as the fund managers can pick the absolute most opportune time to sell the work. Because these are closed funds based on one of a kind pieces, it is difficult to mark the fund to market, besides a professional valuation.
What I find most interesting is the investment strategy of these funds. Horwitz states that there are usually three strategies funds use: diversified, region specific, and distressed assets. As the art investment fund is still in its infancy, it is clear that many of these funds take a fairly conservative investment approach. Very few are focused on small name artists looking to hit the lottery.
If I set up an art fund I would call it the NK1 Fund and most likely take a diversified approach. I am weary of putting all the capital into art from one geographic area or one style of art. In the Tosca Photography Fund 2011, the fund’s head stated, “As seen in these sales, not every high ticket item sold, but perhaps that is not a bad thing as it indicates connoisseurship rather than exemplifying the vortex in which everything that is offered is absorbed by the market”. This quote explains that there is risk involved in the investment, however quality art collections carry more assurance with the current sophisticated collectors.
In my fund I would look for heavily undervalued contemporary pieces from masters, as well as low value not-yet famous artists. The low value masters would be used to hedge against risk. One example of this would be Picasso’s Les femmes d'Alger, version L. The painting recently sold for $21 million, well under its $30 million estimate. Using this strategy of holding big name pieces, I would also lend the art work out to galleries and museums for a few percentage points, hoping to further increase the value. 
Among the diversified art pieces, my fund would also invest in new up and coming artists in hopes that over the longer period of time, their art would greatly appreciate in value. Finding lists and following the emerging art scene would be extremely important. However, taking a hands on role in choosing work would greatly benefit the fund. I would invest in artists like Colin Roberts, an emeging artist who works with Plexiglass (shown below). He has recieved recent noteariety, and a sharp increase in demand for his work could mean a great return. 
The main strategy for my fund would be buy and hold (while putting the famous works in galleries). I believe that the small arbitrage transactions, and buying distressed work carries far more risk.