As soon as one pension fund announces a crypto-related investment other funds may follow. Industry participants claim that allocations will likely be based on due diligence, and may even be restricted to specific categories.
The investment arm of London-based M&G plc invested $20 million Global Futures & Options Holdings (GFO-X), the company said Sunday. GFO-X, the UK’s only centrally cleared crypto derivatives trading venue regulated under the Financial Conduct Authority.
M&G plc — with roughly five million investment, insurance policy holders and pension customers — made the allocation on behalf of the Prudential With-Profits Fund. As of June 30, the company had assets worth 357 billion dollars (332 billion euro).
After pension funds like the US Aerospace and Defense firm Lockheed Martin’s retirement plan reportedly supported crypto broker Hidden Road, this investment is a welcome one.
CFA Institute’s April 2022 survey found that 94% (of state and government pension sponsors) reported their investment in crypto. This report did not mention the specific type of investments that respondents allocated to crypto. However, it found that 62% of defined benefit corporate plans invested in the sector.
According to CK Zheng of the crypto hedge fund ZX Squared Capital, after several major industry players collapsed, pension funds should carefully evaluate the risks and rewards associated with investing in cryptocurrency assets.
“Given the nature of their prudent investor bases, most of them have little or no exposure to cryptos due to the market volatility, regulatory and reputational concerns,” Blockworks reported that he said this.
This caution is due to the fact that several pension funds were caught in the bankruptcy of Celsius and FTX during the past two years.
Canadian pension fund manager Caisse de dépôt et placement du Québec (CDPQ) had invested $150 million into Celsius in October 2021 — less than a year before the crypto lender filed for bankruptcy the following July.
Teachers’ Venture Growth (TVG), the Ontario Teachers’ Pension Plan Board’s venture arm, announced that in November of 2022 it had invested $95 millions in the Bahamas based FTX as well as its US subsidiary.
Zheng noted that in light of the failures of crypto entities, pension funds would continue to demand more diligence from their investors before they invest. Zheng said that such funds will likely invest in the sector.
“As bitcoin has the highest Sharpe ratio risk adjusted returns among all the major asset classes through the last decade, pension funds definitely want to have certain allocation to crypto as a way of diversification,” Zheng spoke out. “We expect a lot more pension fund investments after the BlackRock [and] Fidelity spot bitcoin ETFs get approved by the SEC early next year.”
BlackRock, Fidelity and other major financial institutions are launching a Bitcoin ETF. However, there are more than 12 issuers who want to offer such a product.
The US Securities and Exchange Commission is set to rule on a proposed bitcoin ETF by Ark Invest and 21Shares by Jan. 10 — a date by which some industry watchers expect the regulator to also decide the fate of other similar applications. SEC had never approved ETFs with direct investments in BTC. They could again choose to reject them.
Dan Hoover, chief operating officer at Castle Funds, said conservative pension plans could also — for the time being — focus on infrastructure plays in the crypto space. This could involve putting money into clearing houses, derivatives markets or any other “capital-intensive parts of the trading value chain,” He made a note.
Such investments are more likely to be made through funds than directly, he added — a trend Hoover said was common during the last wave of institutional crypto investment.
“Regarding direct investment into tokens, I think that pension funds are still trying to classify the exposure,” He said. “It’s not a traditional asset class, so it doesn’t fit well into their asset allocation models and policies.”
M&G cited “an evolving and maturing regulatory landscape for digital currency assets” It announced its investment plans on Sunday. The US has lagged behind in establishing a clear crypto-regulation.
US Department of Labor warns plan fiduciaries “to exercise extreme care” Hoover cautioned that it is important to consider the pros and cons of adding crypto-currency options to your 401(k).
“He added” “At least in the US, the guidance from the Department of Labor regarding crypto options in 401(k) plans makes it clear that plan sponsors face significant skepticism from their primary regulator.”
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