First Public Pensions Pile Into Crypto

With bitcoin prices mired well below $4,000 after a punishing 2017 for the formerly high-flying cryptocurrency (though to be fair, most other tokens have fared even worse), has the long-awaited horde of institutional marginal buyers finally arrived to rescue crypto?

Bitcoin

That’s unlikely, given the myriad regulatory concerns (and the still prevalent hacks and scams plaguing the industry) surrounding the world’s newest asset class remain a barrier. But Bloomberg offered some hope to desperate crypto bulls (Tom Lee and Mike Novogratz among them) when it reported Tuesday that a previously obscure firm called Morgan Creek Digital has launched the first crypto-focused venture fund that includes two US pension funds as anchor investors, an arrangement that BBG described as the first of its kind.

Two pension plans in Fairfax County, Virginia are anchor investors in a new $40 million venture-capital fund, according to a statement from the company. Other investors include an insurance company, a university endowment and a private foundation, said Morgan Creek Digital founder Anthony Pompliano, who declined to provide further details.

Many institutional investors, which crypto enthusiasts believe will be drawn to digital assets because of their volatility and potential out-sized gains, have been deterred by market manipulation and a lack of regulation. The Virginia pension funds join a handful of institutions to invest in the crypto world, including Yale University, the second-largest endowment in higher education that invested in a digital assets fund last year.

The pension funds involved include two defined-benefit plans managed by Fairfax County Retirement Systems (which, like many underfunded public pension funds across the US, is struggling with rising burdens as recipients live longer than initially expected). To wit, the investment comes on the heels of reports about the county flirting with raising its retirement age in recent years as funding-related costs eat up an ever-greater share of the county’s budget, according to the Washington Post.

Hence, the fund’s stated interest in crypto’s “attractive asymmetric return profile.”

Many institutional investors, which crypto enthusiasts believe will be drawn to digital assets because of their volatility and potential out-sized gains, have been deterred by market manipulation and a lack of regulation. The Virginia pension funds join a handful of institutions to invest in the crypto world, including Yale University, the second-largest endowment in higher education that invested in a digital assets fund last year.

Fairfax County Retirement Systems manages three separate defined benefit plans, two of which invested in the Morgan Creek Digital fund, said Pompliano. Katherine Molnar, chief investment officer of one of the funds, said in a statement that blockchain technology, which was first developed to record the movement of Bitcoin, is an “emerging opportunity” that offers an “attractive asymmetric return profile.”

In the spirit of “diversification”, Morgan Creek’s fund will invest most of its capital in private companies with a digital-currency or blockchain focus, while reserving some of its assets to be directly invested in liquid cryptocurrencies.

Pompliano said his new fund is structured like a traditional venture capital fund that will invest in the equity of companies in the blockchain and digital assets industry. The fund will also hold a small percentage of its value in liquid cryptocurrencies, such as Bitcoin, said Pompliano. Bitcoin lost about 75 percent of its value in 2018.

“There’s a belief in the institutional world that if the industry will be around for a long time, it will be very valuable,” Pompliano said in a phone interview. “The smart money is not distracted by price but looks at the long-term trends, and believes they’re betting on innovation as a great way to deliver risk-mitigated returns.”

Morgan Creek Digital, which is an affiliate of the investment manager Morgan Creek Capital Management LLC, exceeded its original target of $25 million for the fund. Its pitch: all traditional assets will eventually be represented by digital tokens, while the influx of intellectual capital into digital assets will create positive returns. It also argues that cryptocurrencies are not correlated to traditional assets, giving investors unique exposures.

For now, at least, Fairfax County retirees can breath a sigh of relief. Because the double-digit return projections we imagine will soon be penciled into the funds’ balance sheets will temporarily lift the pressure to raise the retirement age while taxpayers can worry less about shouldering a rising share of the fund’s cost burden.

That is, until reality sinks in, leaving a giant hole where lofty market-beating returns were “supposed” to be.

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Author: Tyler Durden

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