One of the subjects that causes a great deal of consternation within the art market is the use of guarantees by the auction houses. A few days ago, the New York Times suggested that Sotheby’s was operating differently by proffering a guarantee to the seller of the Gustav Klimt this week in London. The seller was offered a guarantee directly from Sotheby’s which then arranged an irrevocable bid for the work.

In today’s earnings remarks released before the call, CEO Tad Smith discusses the use of guarantees. He refers to the process described above as a hedge. That’s not really the best way to think about it. A hedge involves using one trade to counteract the possible negative outcomes of another trade. Here Sotheby’s is replacing their direct offer with a minimum offer that reduces their risk with a definite sale (as a opposed to benefiting from the opposite eventuality.)

Either way, Sotheby’s has a $48.3m in exposure to the next fortnight’s sales:

With respect to our hedging of such guarantees, as of February 22, 2017, we had outstanding auction guarantees totaling $147.7 million and as of that date we have reduced our financial exposure with irrevocable bids totaling $89.4 million, and may yet secure more irrevocable bids in the lead up to the March sales.