Where pension funds stand today on crypto investments

As one pension fund reveals a new crypto-related investment, others may soon follow. Though allocations are likely to follow ample due diligence and could be limited to certain categories, industry participants say.

The investment arm of London-based M&G plc invested $20 million Global Futures & Options Holdings (GFO-X), the company said Sunday. GFO-X is the UK’s first centrally-cleared crypto derivatives trading platform venue regulated by the Financial Conduct Authority, it noted.

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. The company managed 332 billion euros ($357 billion) in assets as of June 30.

The investment comes after pension funds, including the retirement plans of US aerospace and defense firm Lockheed Martin, were reportedly backing crypto broker Hidden Road.

A CFA Institute survey in April 2022 found that 94% of state and government pension plan sponsors reported investing in crypto. The report, which did not specify the type of crypto-related investments respondents were allocating to, also found 62% of corporate defined benefit plans were putting capital toward the sector.

But particularly after the collapses of several large industry players, pension funds must carefully assess the risk and rewards of investing in crypto assets, according to CK Zheng, co-founder of crypto hedge fund ZX Squared Capital.

“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,” he told Blockworks.

Such caution comes as several pension funds got caught up in the bankruptcies of Celsius and FTX over the last 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.

The Ontario Teachers’ Pension Plan Board said in November 2022 that the fund it was overseeing had invested $95 million in Bahamas-based FTX and the exchange’s US subsidiary through its venture arm, Teachers’ Venture Growth (TVG).

In the wake of such crypto entity failures, pension funds are likely to continue requiring more due diligence before investing in the space, Zheng said. He added, however, that such funds are likely to be attracted to the segment.

“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 argued. “We expect a lot more pension fund investments after the BlackRock [and] Fidelity spot bitcoin ETFs get approved by the SEC early next year.”

While BlackRock and Fidelity are the largest financial players seeking to launch a spot bitcoin ETF, they represent just two of more than a dozen issuers vying to bring such a product to market.

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. The SEC has never approved ETFs that have directly invested in BTC, and could choose to again deny 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. These could include putting capital into derivatives markets, clearing organizations or other “capital-intensive parts of the trading value chain,” he noted.

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” in its Sunday investment announcement. Such crypto regulatory clarity has lagged in the US.

The US Department of Labor has warned plan fiduciaries “to exercise extreme care” before considering adding a cryptocurrency option to a 401(k) plan’s investment menu, Hoover noted.

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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