Could crypto assets and blockchain technology be the next focus for pension funds and traditional financial institutions?
Positive moves are being made for investor sentiment in the cryptocurrency space despite a year-long bear market.
This comes after $40 million was raised by cryptocurrency investment firm Morgan Creek Digital, which is headed up by its founder, Anthony Pompliano. The crypto-focused hedge fund is part of Morgan Creek Capital, which manages over $1 billion in assets.
While the capital raised isn’t record-breaking, the move garnered interest because a portion of the funds come from two of three benefit plans from Fairfax County’s Retirement Systems (FCRS) in the state of Virginia. The news is being hailed as the first time a United States pension fund has directly invested into cryptocurrency assets.
The firm had initial set its fundraising target at $25 million, but a surge in interest from investors saw the cap raised to $40 million. These funds will be used in the newly launched Morgan Creek Blockchain Opportunities Fund.
After the lofty highs of 2017, the cryptocurrency markets have endured a humbling and ongoing price correction. As a result, investors have been far more cautious about throwing capital into the space, having been burned by the current bear market.
Considering this fact, the move by Morgan Creek Digital is a positive sign for the cryptocurrency ecosystem amid a testing 12 months.
Cointelegraph spoke directly to Pompliano to unpack some of the details around the fund, how it managed to seal investment from pension schemes, and the challenges of managing a crypto investment firm during trying marketing conditions.
Firstly, working to secure funding from the Fairfax County Police and Employee’s pension plans was a process that didn’t happen overnight. As Pompliano told Cointelegraph, a lot of work had to be done to ensure the fund managers that the investment was the right move:
“Institutional investors are still getting comfortable with digital assets in general. It took a lot of education and time to ensure these investment professionals understood what the pros and cons were. Additionally, the CIOs [chief investment officers] are intelligent people who have the courage to be first.”
This seems to be the greatest hurdle for cryptocurrency investment, given the bad run in the markets and the association of volatility within the space. Patience, Pompliano suggests, is a key factor for the future of the markets:
“More investors will gain familiarity with digital assets over time, which ultimately leads to comfort. As investors get comfortable, they’ll begin investing more capital in the space.”
Perhaps the biggest victory is the fact that the digital asset fund secured investment from pension funds, which are by nature conservative, in order to ensure the provision of income for beneficiaries at retirement.
Contrary to the perception that Bitcoin is a highly volatile asset, Pompliano insists that the cryptocurrency meets the criteria of an asymmetric return profile — meaning the potential upside of the investment outweighs the potential downside risk:
“Bitcoin is a non-correlated asset with an asymmetric return profile. This is the holy grail for an institutional investor.”
When asked if the prospect of investing money into a crypto-focused fund was a daunting task, Pompliano said that the firm was well aware of the risks associated and took on a manageable amount of capital:
“We set out to raise a $25M fund and oversubscribed it to $40M. We only took the money that we felt we could deploy in an intelligent, risk-mitigated way.”
Fairfax reassure pension beneficiaries
Naturally, some people were disconcerted by the move, given the length of the bear market and perceived volatility of cryptocurrency markets over the past 12 months.
According to Jeff Weiler, executive director of FCRS, the Employees’ Retirement System contributed $10 million to the fund, which amounts to just 0.3 percent of the system’s total assets.
The Police Officers Retirement System invested $11 million into the fund, which equates to 0.8 percent of that department’s total assets.
Furthermore, Weiler made it clear that the investments were not singularly focused on Bitcoin:
“At least 85% of the Morgan Creek Blockchain Opportunities Fund will be invested in blockchain technology firms. As such, this is very similar to other private equity investments made by Fairfax’s three retirement systems. No more than 15% of the funds will be invested in actual cryptocurrencies and, to-date, the Fund has no exposure to any cryptocurrencies.”
Weiler also assured beneficiaries that significant research went into the move, involving staff, board members and Morgan Creek. County attorneys and outside parties were also consulted in the drawing up of investment contracts.
However, the parting shot of the release reminds people of the inherent risk of investments and the reality of the space. As Weiler explains, risk was mitigated by the actual amount of money that was invested into the fund:
“All investments involve risk and this investment is no different. However, as they would do with any investment, Fairfax’s investment team determined that the expected returns from this investment were in line with the level of risk incurred. This also played a big part in how much was invested.”
Cointelegraph reached out to Weiler for further comment, who noted that some beneficiaries of the fund had raised concerns about the move, which led to the full statement released last week.
When asked if he expected other governmental pension funds to look to invest in the space, Weiler replied that ‘he had no idea’.
Interestingly, the executive director also said that the Fairfax County in-house investment team was responsible for finding the investment opportunity, as opposed to Morgan Creek approaching the department for funding.
Setting a new precedent?
As reported by Cointelegraph last week, the Global Blockchain Business Council (GBBC) released results of an ongoing survey that suggests that 41 percent of participating institutional investors would look to put funds into digital assets in the next five years.
This survey was carried between December 2018 and January 2019, and 71 global institutional investors took part, which included private equity, hedge funds and pension funds.
Furthermore, digital asset management fund Grayscale Investments released their latest quarterly results, which suggests that the amount of funds coming from institutional investors into the crypto markets is on the rise.
Their data shows that institutional investors accounted for 66 percent of funds raised in the last quarter of 2018, while the effect of the bear market has investors looking at making moves in the long term.
In October 2018, financial services giant Morgan Stanley went as far as releasing a report that labelled cryptocurrencies as a new institutional investment class.
As Pompliano suggested in his response to Cointelegraph, time will be the ultimate test for institutional investors becoming more willing to invest in the crypto space.
These first few steps are perhaps the most important then, as a select few institutions blaze the trail and invest a small, but important amount of capital in a sector that has the potential to grow exponentially.