Like oil and water, or maybe not?

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There are good reasons why pension funds not invest in the crypto and blockchain space. The industry is too new, too volatile and stupidly technical. In addition, the rules and regulations for the sector have yet to be established.

However, the fixed-income financial instruments usually favored by pension funds – such as long-term government bonds – hardly pay anything today, so that the traditional administrators of employee pension schemes are faced with a dilemma: Where do you find the return on investment in a world where inflation is looming?

It is therefore not entirely surprising that pension funds – the most cautious institutional investors – are now taking a closer look at the booming crypto / blockchain sector.

“Family offices brought charges against crypto funds a few years ago, but we’ve seen an increasing interest in pensions and there are many pensions now exposed to crypto,” said Stephen McKeon, professor of finance at the University of Oregon and partner at Collab + Currency, said Cointelegraph.

“We saw an increased interest in pension insurance over the past year,” added Christine Sandler, Head of Sales, Marketing and Research at Fidelity Digital Assets – part of an upswing among all institutional segments – “which we believe reflects the growing complexity and institutionalization “. of the digital asset ecosystem combined with a strong macro narrative powered by the pandemic response. “

Pension funds tend to be “more conservative, risk averse investors compared to other segments,” according to Sandler, and they tend to prefer investments that have long-term growth and low volatility that could potentially make them suspicious of crypto / blockchain.

An early adopter

One of the first U.S. pension funds to invest in blockchain companies was the Fairfax County Police Officers Retirement System, based in Fairfax, Virginia. It tested the water back in 2018 with a 0.5% allocation to a fund that invested in blockchain-related companies, Katherine Molnar, the fund’s chief investment officer, told Cointelegraph at the recent SALT conference in New York City.

The fund increased its allocation to 1% in 2019 and added two new blockchain-related mutual funds in spring 2021. The current target allocation is 2%, but as crypto and crypto-based companies have appreciated, 7% of total fund assets are now crypto-related – again mostly pick-and-shovel-type companies that support the industry – such as crypto exchanges and custodians.

The pension fund cannot rebalance because it is invested in venture capital funds, Molnar explained, but in mid-September Fairfax signaled its intention to invest $ 50 million in Parataxis Capital, a crypto hedge fund that invests in digital tokens and cryptocurrency derivatives. “It’s not a directional bet, but it’s not completely illiquid either,” she told Cointelegraph.

The fact that until recently the police officers’ pension fund invested in crypto-related companies as opposed to cryptocurrencies – Coinbase and not Bitcoin (BTC) – is also not uncommon. U.S. institutional investors surveyed by Fidelity Digital said they were more inclined to digital investment products than to own cryptocurrencies directly, Sandler told Cointelegraph, adding:

“We also know from our study that pension funds and defined benefit plans, like many other institutional investor segments surveyed, prefer the active management of an investment product with digital assets.”

More pension funds could now go this way. “We see participation not only from the hedge fund segment, in which we have long seen participation, but now also from other institutions, pensions and foundations”, Michael Sonnenshein, CEO of Grayscale Investments – the largest manager of digital assets – Bloomberg said earlier this year, adding that he believes pension funds and foundations would drive much of his investment firm’s future growth.

Even pension fund giants like the California Public Employees Retirement System (CalPERS) have dipped a toe in the crypto / blockchain ocean. CalPERS invested in bitcoin mining company Riot Blockchain LLC a few years ago and has since increased its stake to about 113,000 shares valued at about $ 3 million in early October, despite that compared to the $ 133.3 billion tiny in managed equity of CalPERS is 13F filing in August.

How much is enough

Which crypto allocation is appropriate for a pension fund today? Jim Kyung-Soo Liew, Assistant Professor at Johns Hopkins University’s Carey Business School, co-authored one of the earliest academic papers on crypto and pension funds in 2017. It found that a Bitcoin allocation of 1.3% “optimal” to complete would reap the diversification advantage of the cryptocurrency.

What is appropriate today? “Going forward, an institutional investor should consider an allocation of 10-20%,” Liew told Cointelegraph, and he expects large pension funds to invest up to a fifth of their total assets within the crypto / blockchain space for the next three to the next five years.

“We’ll see more institutional investors,” said Liew, adding, “Their horizons are long.” Today’s market capitalization of $ 2 trillion could grow to $ 20 trillion in the next three to five years, he added , assuming a favorable regulatory environment.

When asked whether this contradicts the traditional conservatism of pension funds, Liew replied: “Pension funds have boards of directors; they have investment committees, “and yes,” they are often accused of being overly conservative and wanting to understand 100% of things before they act. ”

From an education perspective, it will take some time and effort to bring them with you, but chief investment officers are pretty smart as a group and will be able to understand the concepts, Liew said. He admitted one problem: “They are not rewarded for taking risks.”

Obstacles remain

There may be other obstacles. “One challenge is that annuities usually require large tickets,” McKeon told Cointelegraph, “so the room had to mature a bit to accept that amount of capital. As the funds continue to grow, we expect more pension participation. ”Volatility remains an issue, Sandler said, citing data:

“The 2021 Institutional Investor Digital Assets Study found that 73% of US pension funds, defined benefit plans, and foundations and trusts surveyed named volatility as the biggest barrier to adoption.”

US pension funds and defined benefit plans still have fairly negative attitudes towards digital assets, according to the survey, “but I think we’ll see that this negative perception will continue to decrease as the market matures and these investors become familiar with the technology, Infrastructure and channels for exposure and have a more mature investment thesis on these assets, ”she added.

Therefore, like other institutional investors, pension funds are keen to find investment opportunities. As the New York Times noted, “US Treasuries are the bonds of choice for secure retirement income. But they couldn’t make any real return for the next decade. “

Related: The Long Game: Institutional Interest in Crypto is just beginning

On the other hand, pension funds have a long horizon and can withstand short-term volatility. Another plus point: “Crypto talents are uniformly distributed all over the world and we can find these talents,” added Liew.

Of course, escrow restrictions won’t go away. Many pension funds represent communities and hold the financial well-being of many people in their hands. That’s a lot of responsibility. But you “can’t get a lot of rewards if you don’t take risks,” Liew said.

Some time ago, Molnar’s chairman said, “I understand the need to do this” – the police officers’ pension fund, like most institutional investors, has struggled to grow its money in a persistently low interest rate environment – but some officers “are outside of it.” Reservation, ”he claimed. With the fund’s recent return of 7.25% on its crypto investments, it’s likely that some of these officers are back At the reservation now.



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