Old Meets Young: pension funds and cryptographic investment

Noelle Acheson is a veteran of Business Analysis and a member of CoinDesk's product team.

The following article was originally published in Institutional Crypto by CoinDesk, an information bulletin aimed at the institutional market, with news and views on crypto infrastructure delivered every Tuesday. Register here.

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In revenge, it was learned last week that two public pension funds were key investors in a blockchain fund managed by Morgan Creek. "Institutions are here!", Cried out, "We knew it would happen!" He echoed the jubilant chorus that hailed late last year that the Yale Endowment Fund was plummeting into the blockchain sector via an investment in two cryptographic funds.

Just like this reaction, this one is exaggerated – but the news is positive and highlights some more global trends that indicate an increased involvement of institutions.

Not enough

First, let's see why it is exaggerated.

1. Technically, it is not about "two public pensions". These are actually two separate parts of the same investment program (Fairfax County Retirement Systems).
2. These pension funds do not invest in crypto-currencies, but in a blockchain venture capital fund, which will take mainly stock positions in startups. The fund may contain a relatively small amount of cryptocurrency (up to 15%), but does not do so at the moment.
3. The amount invested is only $ 21 million, representing less than 0.3% of the total badets under management of the Fairfax County Pension Plan. 15% of this amount (the maximum that can be allocated to cryptocurrencies) is just over $ 3 million, a tiny drop in the ocean for the entire market.
4. It is not unusual for a pension fund to invest in venture capital. Pension funds as venture capital. It's not just above-average returns (CalPERS, one of the largest pension funds in the world, confirmed last week that private equity was its best-performing badet clbad at the same time in the long and short term), which was absolutely necessary given the disappointing expectations for other clbades of badets. It is also that they manage to "mark the model", which means that it is valued at the expected price, not the market price.

Dominant winds

But here's the part that can excite us: we talk about Pension fund, usually the most conservative type of fund. It is not that we have a brave pension fund here, they are not allowed to do it. Here we have a pension fund that sees blockchain investments as mature enough that unforeseen courage is not needed.

In addition, pension funds like long-term investments. This decision therefore sends the constructive message that blockchain projects are not a quick turnaround.

And it should be noted that these are not just pension funds. Fairfax County is the most populous and one of the wealthiest in one of the richest states.

His prospects for paying pensions are far from optimistic. The two pension plans invested (employees and police) are only funded at 70% and 85% respectively – they do not have enough badets to meet their future commitments.

To further complicate the situation, the aging of the population means that by 2025, the region will likely have more retirees than employees. It is therefore increasingly urgent to find sources of "extra" return – even if it means more risk -.

Fairfax County can be seen across the country.

In 2017, the median funded ratio of public pension plans in the United States was just over 70% – with some states at 30%. Better returns are becoming less "pleasant to have" and more and more imperative – this means that the risk profile of pension funds (for better or for worse) is likely to change over the next few years, which will encourage managers to look to the future. more closely to low correlation alternative investments.

It is also significant, but not surprising, that the first pension fund incursions into blockchain investments come from the public sector. According to a report released earlier this month by the Center for Retirement Research, in the United States, 72% of public pension portfolios are in "risky badets" (equities and alternatives), compared with only 62% in the plans. private. It makes more sense than it seems: accounting rules dictate that the private sector uses a bond yield as the discount rate; Public sector plans can use the expected rate of return on their investments. The higher the risk, the higher the expected return and the lower the funding required.

Gear switch

So, although we can not conclude that "institutions are here" with this news – this is not the turning point at first glance – we can expect to see other ads like this then that public pension funds in the United States decide that the blockchain investments, including cryptographic badets, present an acceptable risk profile, even desirable.

Fund managers, especially the more conservative, tend to come together, which could happen fairly quickly. This does not mean that it will happen soon: the market for cryptographic badets still needs some maturation both in terms of infrastructure and liquidity. However, the Morgan Creek announcement, as well as a recent Cambridge Associates market research report, encouraging institutions to begin examining the sector, indicate that the shift has begun.

Old and new image via Shutterstock