Like oil and water, or maybe not? There are good reasons to retire not Invest in the cryptocurrency and blockchain space. The industry is too new, too volatile and too technical. In addition, the rules and regulations for this sector remain unresolved.
However, the fixed-income financial instruments typically preferred by pension funds – such as long-term government bonds – hardly pay anything these days, so that traditional carers of the pension fund are faced with a dilemma: Where do you find the return on investment in an inflationary world?
So it’s not entirely surprising that pension funds – the most conservative institutional investors – are now giving a glimpse into the booming crypto / blockchain sector.
“Family offices brought charges against crypto funds a few years ago, but we’ve seen a growing interest in pensions and there are many pensions now exposed to crypto,” said Stephen McKeon, a professor of finance at the University of Oregon and a partner at Collab + Currency, said Cointelegraph.
Christine Sandler, Head of Sales, Marketing and Research at Fidelity Digital Assets, added: “We have seen an increased interest in annuities over the past year” – “which we believe reflects the growing complexity and institutionalization of the digital asset ecosystem with a strong Macro narrative powered by the pandemic response. “
According to Sandler, pension funds tend to be “more conservative and risk averse than other segments” and primarily prefer investments that have long-term growth and are less expensive.
An early adopter
One of the first U.S. pension funds to invest in blockchain companies was the Fairfax County Police Officer Retirement System, based in Fairfax, Virginia. 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 appreciate, 7% of total fund assets are now crypto-related – again mostly industrial – like crypto exchanges and custodians.
Molnar stated that the pension fund cannot offset because it invests in venture funds, but in mid-September, Fairfax signaled its intention to invest $ 50 million in the Parataxis Capital hedge fund. Cryptocurrency investments invest in digital tokens and crypto derivatives. “This is not a directional bet, but it is not completely illiquid either,” she told Cointelegraph.
It is also not uncommon for police officers’ pension funds to invest in crypto-related companies instead of crypto until recently – Coinbase instead of Bitcoin (BTC). Sandler adds:
“We also know from our research that pension funds and defined benefit plans, like many of the other institutional investor segments examined, prefer the active management of investment products with digital assets.”
Now more pension funds could go this way. Michael Sonnenshein, CEO of Grayscale Investments – the largest digital asset manager – told Bloomberg earlier this year, adding that he believes pension funds and foundations will fuel much of the future growth of his investment firm.
Even retirement giants like the California Public Employees Retirement System (CalPERS) have their toes dipped 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 – though that number is tiny by comparison, managed by CalPERS. 13F filed in August.
How much is enough
What Kind of Crypto Allocation is Right for Retirement Today? Jim Kyung-Soo Liew, Assistant Professor at the Carey School of Business at Johns Hopkins University, co-authored one of the earliest academic papers on cryptocurrencies and pension funds in 2017. In this paper it was stated that a Bitcoin allocation of 1.3% would be “optimal” in order to take full advantage of the diversification advantages of cryptocurrencies.
What is appropriate today? “Going forward, an institutional investor should consider an allocation of 10-20%,” Liew told Cointelegraph, adding that he expects large pension funds to invest up to a fifth of their total assets over five years.
98% of retirement accounts in the US are inaccessible #Bitcoin.
That’s $ 36.8 billion.
What if they do?
– Dan Held (@danheld) October 7, 2021
“We will see more institutional investors,” said Liew, adding, “Their vision is long.” Today’s crypto market cap of $ 2 trillion could grow to $ 20 trillion in the next 3 to 5 years, added he added, assuming an advantage in the regulatory environment.
When asked if this would happen given 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% things before they act. “
From an educational standpoint, it will take some time and effort to bring them with you, but investment managers are a pretty smart bunch and they should be able to understand the concepts, Liew said. He admits one problem: “You are not rewarded for taking risks.”
There may be other obstacles. “One challenge is that annuities tend to require more money, so the room has to mature a bit to accept that capital,” McKeon told Cointelegraph. As the funds continue to scale, we expect more pension participation. Volatility remains an issue, “said Sandler, pointing to the data:
“The 2021 Institutional Investor Digital Asset Study shows that 73% of US pension funds, defined benefit plans, funds and platforms surveyed believe that volatility movements are the biggest obstacle to adoption.”
According to the survey, US pension funds and defined benefit plans still tend to have negative attitudes towards digital assets, “but I think we will continue to find that negative perception diminishes as the market matures and these investors become more 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 looking for investment opportunities. As the New York Times noted, “US Treasuries are the bond of choice for a secure retirement income. But they are unlikely to bring any real profit in the next decade. “
Related: The Long Game: Institutional Interest in Cryptocurrencies is Just Beginning
On the other hand, pension funds have a long-term perspective and can withstand short-term fluctuations. Another plus point: “Crypto talent is evenly distributed around the world and we can source that talent,” added Liew.
Of course, fiduciary restrictions will not go away. Many pension funds represent the communities directly under central government and keep many people’s finances at the end of their lives. That’s a lot of responsibility. But you “can’t make a lot if you don’t take a certain risk,” says Liew.
Some time ago, Molnar’s chairman said, “I understand the need to do this” – police officers’ pension funds, like most institutional investors, have difficulty raising money in an environment of persistently low interest rates – but some officers “have no reservations “He claimed. Given the fund’s recent 7.25% return on crypto investments, it is reasonable to assume that some of these officials are back. Above Pre-order now.