Like oil and water, or maybe not?

Pension funds should have good reasons no Invest in the fields of encryption and blockchain. The industry is too new, too unstable, and the technology is boring. In addition, the rules and regulations governing the industry have not yet been determined.

But the fixed-income financial instruments commonly favored by pension funds—such as long-term government bonds—now pay almost no fees, so traditional managers of employee retirement funds face a dilemma: In a world where inflation is imminent, where can I find investment income?

Therefore, it may not be entirely surprising that pension funds-the most cautious institutional investors-are now paying close attention to the booming cryptocurrency/blockchain industry.

Stephen McKeon, professor and partner of finance at the University of Oregon, said: “A few years ago, family offices led the investment in cryptocurrency funds, but we are seeing increasing interest in pension funds. Many pension funds are exposed to cryptocurrency.” At Collab+Currency, told Cointelegraph.

Christine Sandler, head of sales, marketing and research at Fidelity Digital Assets, added that in the past year “we have seen an increase in interest in pensions”-which is part of the growth of all institutional sectors-“we think this reflects the increasing complexity and institutional To transform the digital asset ecosystem, combined with a powerful macro narrative to respond to the pandemic.”

According to Sandler, pension funds are often “more conservative and risk-averse investors than other sectors”. Most of them favor investments that show long-term growth and low volatility, which may make them more interested in cryptocurrencies/ Blockchain is skeptical of space.

Early adopters

The Fairfax County Police Officers Retirement System in Fairfax, Virginia is one of the first U.S. pension funds to invest in blockchain companies. The fund’s chief investment officer, Katherine Molnar, told Cointelegraph at a recent SALT conference in New York City that it tested the waters in 2018 and allocated 0.5% of its funds to a company that invested in blockchain. Of funds.

The fund increased its allocation to 1% in 2019 and added two new blockchain-related investment funds in the spring of 2021. The current target allocation is 2%, but because the value of crypto and crypto-based companies has been rising, 7% of the overall fund assets are now crypto-related—similarly, they are mainly “picky” companies that support the industry—such as cryptocurrencies. Exchange and custodian.

Molner explained that the pension fund could not be rebalanced because it invested in venture capital funds, but in mid-September, Fairfax transmit signal It intends to invest US$50 million in Parataxis Capital, a crypto hedge fund that invests in digital tokens and cryptocurrency derivatives. “It’s not a targeted bet, but it’s not completely lacking liquidity,” she told Cointelegraph.

In fact, the police’s pension fund has only recently invested in crypto-related companies, not cryptocurrencies-Coinbase instead of Bitcoin (Bitcoin) — It’s not uncommon. Sandler told Cointelegraph that US institutional investors surveyed by Fidelity Digital stated that they prefer digital asset investment products rather than directly owning cryptocurrencies, adding:

“From our research, we also know that pension funds and fixed income plans, like many other institutional investor groups surveyed, tend to actively manage investment products that include digital assets.”

More pension funds may now follow this path. “Not only did we start to see the participation of the hedge fund sector, we have seen participation a long time ago, but now it has recently come from other institutions, pensions and endowments,” Grayscale Investments CEO Michael Sonnenshein-the largest manager of digital assets —— Tell Bloomberg added earlier this year that he expects pension funds and endowments to drive much of the future growth of his investment company.

Even pension fund giants like the California Public Employees Retirement System (CalPERS) have dabbled in the cryptocurrency/blockchain ocean. CalPERS invest An investment in Riot Blockchain LLC, a Bitcoin mining company a few years ago, has since increased its shares to approximately 113,000 shares-valued at approximately US$3 million in early October-although compared to the US$133.3 billion in equity assets under management submitted by CalPERS as of 13F , Which is trivial in August.

How much is enough?

What kind of cryptocurrency distribution is suitable for today’s pension funds? Jim Kyung-Soo Liew, assistant professor at Johns Hopkins University Carey School of Business, co-authored one of the earliest academic papers on encryption and pension funds in 2017. Paper It was found that 1.3% of Bitcoin distribution would be the “best” to fully obtain the diversified benefits of cryptocurrency.

What is appropriate today? “Looking forward, institutional investors should consider a 10%-20% allocation,” Liew told Cointelegraph, who expects large pension funds to invest one-fifth of their total assets in the crypto/blockchain sector. The next three to five years.

“We will see more institutional investors,” Liu said, adding, “They have a long horizon.” He added that assuming a favorable regulatory environment, today’s $2 trillion cryptocurrency market value may be in the future It swells to US$20 trillion in three to five years.

When asked if this runs counter to the traditional conservatism of pension funds, Liew replied: “Pension funds have boards of directors; they have investment committees.” Yes, “they are often accused of being too conservative and want to be 100 before taking action. % Understand things.”

Liu said that from an educational point of view, it takes some time and energy to bring them together, but the chief investment officer as a group is very smart and they can grasp the concepts. He admitted that there was a problem, “They won’t be rewarded for taking risks.”

Obstacles still exist

There may be other obstacles. “One challenge is that pensions often require large sums of money,” McKeon told Cointelegraph, “so this space must mature a bit to accept this funding. As the size of the fund continues to expand, we expect more pensions to participate.” Sandler said that volatility is still an issue, he pointed out data:

“The ‘2021 Institutional Investor Digital Asset Study’ found that 73% of U.S. pension funds, defined benefit plans, endowments and foundations cited volatility as the biggest barrier to adoption.”

The survey shows that U.S. pension funds and defined benefit plans still hold a rather negative view of digital assets. “But I think that as the market continues to mature and these investors become more and more satisfied with digital assets, we will continue to see this There are fewer negative perceptions. Technology, infrastructure and exposure channels, and there are more comprehensive investment papers on these assets,” she added.

Therefore, pension funds, like other institutional investors, are also struggling to find investment opportunities. As in the New York Times famous, “U.S. Treasury bonds have always been the bonds of choice for safe retirement income. But they cannot bring real returns in the next ten years.”

related: Long game: Institutional interest in encryption has just begun

At the same time, on the positive side, pension funds have a long horizon and can withstand short-term fluctuations. Another advantage is that “encryption talent is evenly distributed around the world, and we can find these talents,” Liew added.

Of course, trust constraints will not disappear. Many pension funds represent municipalities, and they control the financial situation of many people in their later years. This is a great responsibility. But “if you don’t take some risks, you can’t get a lot of returns,” Liu said.

Not long ago, the chairman of the board of directors of Molna said, “I understand the need to do this”-like most institutional investors, the police pension fund is working to increase funding in a persistently low interest rate environment-but he claimed that some Officials are “not on reservations.”Given the fund’s recent crypto investment return rate of 7.25%, it is certain that some of these officials have returned exist Book now.