Art funds are investment vehicles, the return on which is linked to a portfolio of works of art acquired – as opposed to the stocks, bonds, property and commodities that are the usual components of investment funds. The return to the investor is determined, on the one hand, by the buoyancy of the art market or, more specifically, the bit of it in which the fund is investing (for example, contemporary, Asian or decorative arts) and, on the other hand, by the shrewdness of the decisions made by the funds' managers with respect to specific acquisitions. The more buoyant the art market, the less shrewd the fund managers need to be to beat other financial instruments with which they are competing for investors' attention and money.

Art funds are a relatively new phenomenon, spawned by the financial markets' constant search for new gizmos and by the booming art market, particularly the contemporary art market. About 12 funds have been created in the past three years, playing off the contrast between the surging art market and the flat stock market. Those that have stayed the course include The Fine Art Fund and The China Fund.

Some have missions that seek to combine the power of the market with broader aims – in the case of the Artist Pension Fund, for example, the aim is to create a stream of income for artists in their retirement by cross subsidising less successful artists from the proceeds of more successful ones. Others, such as the Ellipse Foundation and the Wonderful Fund (see p6) have a for-profit framework but a rhetoric that combines commercial and non-commercial intentions in a way that is difficult to decode and disentangle.

Given the thin, lightly regulated and opaque nature of the art market compared with, say, the market for pork bellies or oil futures, art funds are usually aimed at the more speculative and affluent investor, who can afford to take a hit if and when the market implodes. To date, and notwithstanding the hoopla with which they have been launched, and the disproportionate coverage they get in the frothier parts of the financial press, they have not been notably successful either at attracting investors or at generating the sort of returns that appeal to a hard-nosed homo economicus.

One of the more noisily launched, Boston–based Fernwood Investments' art fund – the subject, no less, of a Harvard Business School case study on alternative investment strategies – folded in 2005, less than two years after its launch; and others have been trailed but failed to launch, unable to attract funds sufficient to generate a diversified investment portfolio.

Notwithstanding their financial marginality, art funds raise interesting dilemmas when their holdings are shown in public museums. Whether or not the collector intends it, when works of art are lent to a museum, their value is usually enhanced. The collector can then realise that value through resale of the work with the beefed-up provenance and price that its stint in the public domain accrues.

The failed Fernwood fund explicitly embraced the technique in its description of its proposed investment strategy. Bruce Taub, the fund's founder, told BusinessWeek in 2005 that the fund planned to lend pieces to museums or important exhibitions. That way, he said, "the value of the art will be enhanced through exposure".

There is, of course, nothing new in museums borrowing from and displaying the works of private collectors. The development of art museums' collections throughout the world can only be understood in the context of the relationship between private collectors and their complex motives on the one hand and museum administrators' desire to harness those motives for the pubic good on the other. Directors, administrators and curators are acutely aware of the symbiotic relationship between public access to works of art that may not otherwise be seen, studied or enjoyed, and the private interest of the collector – sometimes wholly venal, sometimes wholly altruistic, and usually a deeply conflicted mix of the two.

The considerations that apply to art funds per se are exactly the same as those applying to any other private entity lending to a public museum, whether it is UBS loaning works to MoMA and Tate Modern or the Duke of Northumberland loaning the Madonna of the Pinks to the National Gallery. The Museums Association in the United Kingdom and the Association of Art Museum Directors in America have broad guidelines on the balancing of public and private interest, and the need for transparency, and accountability in circumstances where there is the possibility of private gain. They represent a pragmatic response to the reality that the public sector is and will remain critically dependent upon the private sector and indeed that the route to donations of work is usually through loans in the first instance. And that few public museums today have acquisitions budgets that allow them to neglect this vital source of new work.

Although the relationship between art funds and public museums is in principle no different from that between other collectors or dealers and museums, museums need to approach possible loans with particular vigilance and particular sensitivity to existing guidelines. While collectors have notoriously complex motives and psychologies, art funds do not: they are there to maximise the rate of return on their holdings, subject to the rule of law. (There is not yet a specific code of ethics for this class of investment vehicles.) This suggests they will take a fairly "instrumental" view of public museums' potential contribution to asset appreciation and, unless they can attract more investors and demonstrate solid returns over the longer term, a fairly desperate one.