Most museums, whether private or public, rely on numerous sources of financing to operate and acquire new pieces. A public museum will usually receive some tax dollars, either directly or through tax breaks, though this source of funds has dried up in recent years. Since most museums are non-profit, they may not have income tax liabilities, but may be responsible for property taxes and alike. Unless a museum is private and financed by a deep-pocketed patron, it must inventively explore multiple funding and investment avenues.
Ticket sales are an important source of revenue, but often don’t cover even half of a museum’s budget. To gin up attendance, museums are forever mounting special exhibitions and programs to attract the ticket-buying public. Of course, constantly mounting new shows is also an expensive proposition. To supplement ticket sales, museums reach out to the business community and philanthropic foundations for funding. One or more businesses may choose to underwrite a particular exhibit if there is some relevant connection. Other businesses may simply put aside a fixed percentage of their profits for public service, which may include supporting local museums.
The dream of any museum curator is to find a reliable foundation that will provide a yearly annuity. Once in a great while, a museum will receive a special gift in the form of a large lump-sum payment, maybe in exchange for renaming a wing of the museum. Then the museum is faced with the pleasant problem of how to manage and invest the bequest so that it can receive a return on the money not scheduled for immediate expenditure.
Museums often work with an investment bank to manage their endowments. The bank in turn seeks out investment opportunities from many sources, including mutual funds, hedge funds, and managed accounts. The aim is to diversify the endowed funds across many markets and industries, so that market risks in one area do not cause undue risk to the entire endowment. Asset classes would include equity, debt, real estate and commodities. Hedge funds are popular with larger museums because they are seen as a potential low-risk way to receive a steady return. After all, the purpose of a hedge fund is to intelligently offset risks without completely compromising returns. Even though hedge funds tend to charge a fairly high performance fee, that fee is only collected from profits. If the hedge fund cannot make a profitable return on your investment, it won’t collect a performance fee. Do that a few years in a row, and the hedge fund will have trouble surviving. A good investment manager will make sure that museum funds are spread over many investment firms, so that no one bad investment compromises financing.