Crypto and pension funds: like oil and water, or not?

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There are good reasons why pension funds don’t invest in the crypto and blockchain space. The industry is too new, too volatile and too technical. In addition, the rules and regulations for the management of the sector have not yet been established.

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There are good reasons why pension funds don’t invest in the crypto and blockchain space. The industry is too new, too volatile and too technical. In addition, the rules and regulations for the management of the sector have not yet been established. But the fixed-income financial instruments that pension funds usually prefer – such as long-term government bonds – pay almost nothing these days. Are there signs of inflation? It’s perhaps no surprise then that pension funds – the wisest of institutional investors – are now cautiously transforming the fast-growing crypto/blockchain sector. “Family offices led to cryptocurrency settlements a few years ago, but we have seen a growing interest in annuities and there are a lot of annuities in crypto now,” said Stephen McKeon, professor of finance at the University of Oregon and currency partner of Collab said.

“We’ve seen increased interest in providing retirement over the past year,” added Christine Sandler, Head of Sales, Marketing and Research at Fidelity Digital Assets – part of a leap across all institutional segments – “which we believe reflects growing complexity. and institutionalization of the digital asset ecosystem. combined with a strong macro narrative driven by the pandemic response. Pension funds tend to be “more conservative, risk-averse investors than other segments”, according to Sandler, and prefer investments that have long-term growth and low volatility that can lead to cryptocurrencies. One of the first US pension funds to invest in a blockchain company was the Fairfax County Police Pension System, based in Fairfax, Virginia. It is testing the waters in 2018 with 0.5% payouts in funds invested in blockchain-related companies, Catherine Molnar, the fund’s chief investment officer, said at the recent SALT conference in New York.

The fund increased its payouts to 1% in 2019 and added two new blockchain-related mutual funds in the spring of 2021. The current target is 2%, but as cryptocurrencies and cryptocurrency-based companies appreciate, 7% of the fund’s total assets are now cryptocurrency-related, most of the companies that support the industry. The pension fund could not be rebalanced because it was invested in a venture capital fund, Molnar explained, but in mid-September Fairfax signaled its intention to invest $50 million with Parataxis Capital, a crypto hedge fund that invests in digital tokens and cryptocurrency derivatives. “It is not a targeted bet, but it is not completely illiquid,” he said.

It’s also not uncommon for police pension funds to recently invest in cryptocurrency-related companies, as opposed to the Coinbase cryptocurrency and not, for example, Bitcoin (BTC). US institutional investors surveyed by Fidelity Digital showed a greater inclination for digital asset investment products than outright ownership of cryptocurrencies, Sandler said, adding: “We also know from our research that pension funds and defined benefit plans, like many other segments of institutional investors surveyed, support active management of investment products with digital assets.” More pension funds can now travel. “We’re starting to see holdings not only from the hedge fund segment, which we’ve been looking at for a long time, but recently also from other institutions, pensions and funds,” said Michael Sonnenstein, CEO of Grayscale Investments – the largest digital asset manager, Bloomberg said. earlier this year, adding that pension funds and donations will drive the bulk of its investment firm’s future growth.

 Pension giants like the California Public Employee Retirement System (CalPERS) have also been sinking their fingers in the crypto/blockchain ocean. CalPERS invested in bitcoin mining company Riot Blockchain LLC a few years ago and has since increased its holdings to about 113,000 shares – worth about $3 million in early October – although this compares to CalPERS’ assets under management of 133, 13F’s filing in August is insignificant. $3 billion as of now. What crypto payments are appropriate for today’s retirement funds? Jim Kyung-Soo Liew, professor at Johns Hopkins University Carey Business School, co-authored one of the earliest academic reports on crypto funds and pensions in 2017. The document states that a 1.3% bitcoin distribution would be “optimal”. to take full advantage of cryptocurrency diversification.

What’s appropriate today? “From now on, institutional investors should seek a 10-20% allocation,” Liou said, expecting large pension funds to invest up to a fifth of their total assets in the crypto/blockchain space over the next three years. year five years.

98% of retirement accounts in the US do not have access to #Bitcoin.

That’s $36.8 billion.

What if they did?

– Dan Held (@danheld) October 7, 2021

“We will see more institutional investors,” Liv said, adding, “Their horizons are long.” Today’s $2 trillion cryptocurrency market cap could swell to $20 trillion in the next three to five years, he added, adding favorable regulations. environment. When asked if this goes against the conservatism of traditional pension funds, Liv replied: “Pension funds have boards of directors; they have an investment committee “and yes, they are often accused of being too conservative and wanting to get 100% of something before they act”. In terms of training, it will take time and effort to pull off, but the chief investment officer is smart enough as a group and will be able to grasp the concept, Liu said. One problem, he admits, is “you’re not being rewarded for taking risks.”

There may be other obstacles. “One of the challenges is that annuities usually require large bills,” McCaune said, “so the room has to mature a bit to accommodate that amount of capital. As funding continues to increase, we expect a larger proportion of pensions. “Instability remains an issue,” Sandler said, citing the data. The 2021 Institutional Investor Digital Asset Survey found that 73% of U.S. pension funds, defined benefit plans, and funds and foundations surveyed identified volatility as a major barrier to adoption.

US pension funds and defined benefit plans still have a relatively negative attitude towards digital assets, according to the survey, “but I think we will continue to reduce this negative perception as the market matures and these investors become more comfortable, channel infrastructure and exposure, and more.” have a more sophisticated investment thesis for these assets,” he added. Therefore, like other institutional investors, pension funds seek investment opportunities. As the New York Times notes, “The Treasury has become the bond of choice for secure retirement income. But they couldn’t make any real returns over the next ten years. “

On the plus side, pension funds have a long horizon and can withstand short-term volatility. Another plus: “Crypto talent is spread evenly around the world, and we can get that talent,” adds Liew. The restrictions on trust won’t go away, of course. Many pension funds represent the community and maintain the financial well-being of many people at the end of their lives. This is a big responsibility. But, “You can’t get much reward if you don’t take the risk,” Liv said.  Some time ago, chairman Molnar said, “I understand the need to do this” – police officer pension funds, like most institutional investors, struggle to replenish their money in a persistent environment with low interest rates – but some officers are out of it.” out,” he claims. With a final refund of 7.25% on his crypto investment, assume that some of these employees are back on reservations.

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