Pension Funds Wade Gingerly into crypto investments
The Houston Fire-Rescue Retirement and Relief Fund (HFRRF) has made a sensation as it is the first time a U.S. pension fund has invested $25 million in bitcoin and ether, leading to the belief that cryptocurrencies are directly credited to the fund’s balance sheet. Certainly, $25 million is nothing compared to the fund’s 5.5 billion total assets, or more accurately, only 0.5% of its assets. But it is the first noteworthy fact from a traditionally conservative pension fund. If other pension funds follow suit, this could be a huge factor in the increased demand for cryptocurrencies, given that these funds collectively hold trillions of dollars in global assets.
HFRRF was definitely not the first U.S. pension fund to start investing in cryptocurrency in general. Apparently, this distinction applies to Fairfax County Police Employees Retirement System and Fairfax County Employees Retirement System, among which Morgan Creek Digital-led funds began investing in 2018, totaling $73 million. Nevertheless, the Morgan Creek funds focused on blockchain technology, not to mention bitcoin, but the pension funds took note of these risky investment methods.
Let us note that in September, it became known that the pension funds of $7.2 billion intend to invest $50 million in a key fund Parataxis Capital Management, engaged in the purchase of digital tokens and cryptocurrency assets. However, the fund’s board of directors authorized the investment. Asked if the funds were thinking about future investments in cryptocurrency and whether they were considering private equity options, Catherine Molnar, head of investments at the Police Pension Fund, said her institution was mulling further investments in cryptocurrency/digital assets.
Some time later, Bank of America conducted an analysis of pension funds investing in cryptocurrencies in a research brief related to digital assets. Analysts Alkesh Shah and Andrew Moss say their analysis shows that many pension funds are still in the development phase. Public pension funds in the U.S. are running large fund deficits, with funds owing about $1.25 [trillion] at the end of FY19, causing owners to try to make up the shortfall between plan assets and liabilities through investments. By the end of 2020, pension funds globally had AUM [assets under management] of $35 [trillion], demonstrating a potential positive trend for digital assets if a number of pension funds increase risk.
BofA mentioned the HFRRF and Fairfax pension funds’ investments and added that Queensland Investment Corporation, the fifth largest pension fund in Australia, was interested in cryptocurrency investments. On the flip side, pension funds in South Africa would be prohibited from investing in cryptocurrencies based on a proposed rule change published recently. Potential changes in cryptocurrency investment rules also threaten other foreign pension companies. In the U.K., for example, investment funds invite professional managers to invest on behalf of the fund, and fund fiduciaries are not allowed to interfere with the current state of the fund, said Kerryn Rosenberg, CEO of Cardano Investment, a U.K.-based pension-funding firm. Representatives of the firm, whose activities are not related to blockchain, told CoinDesk. Rosenberg explained in an email that he was not aware of any U.K. pension funds actually contemplating the strategic use of cryptocurrency as an asset type. According to him, the asset investment strategies psychologists use do not involve cryptocurrencies, so perhaps if asked, they would not agree. Nonetheless, cryptocurrency investments can be made by investment managers on a more operational basis as part of a broader mandate.
James Stickland, CEO of London-based digital active trading infrastructure maker Elwood Technologies, is also skeptical that the U.S. retirement investment trend will sweep the U.K. There is a growing organizational demand for resources from banks, hedge funds, private equity firms and even family offices in the U.K., he said. Despite this, pension funds have yet to use even a small percentage of their portfolios because of the risk associated with assets such as bitcoins. He doesn’t think they will start following U.S. pension funds anytime soon, but it’s possible, assuming inflation doesn’t stop worrying.
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