Public Pension Systems Join Those Stung by Crypto Crash

Among the investors who have bet on cryptocurrency over the past year are pension funds that manage the retirement savings of civil servants. Now these funds are sailing in the crash.

Last fall, a Quebec pension fund invested $150 million in Celsius Network LLC. In July, the cryptocurrency lender filed for bankruptcy protection.

A $5 billion retirement fund at the Houston Fire Department said last October that it had invested $25 million in bitcoin and ether. Since that announcement, both cryptocurrencies have fallen over 50%.

“Of course, we would have preferred otherwise,” Houston Firefighters Relief and Retirement Fund chief investment officer Ajit Singh said in an email. But “volatility and large fluctuations are expected”.

Public pension funds have increasingly ventured into less traditional assets over the past two decades in response to low fixed income yields. Unable to rely on bond yields to meet ambitious 7% return on investment targets and pay out trillions of dollars in promised benefits, pension managers invested in private equity, real estate and even forest land. .

Over the past few years, as crypto investments have boomed alongside equities during the stimulus-fueled economic recovery, some pension fund managers and advisors have seen an opportunity.

At two conferences last year, the Texas Association of Public Employee Retirement Systems hosted a series of crypto panels, including one titled “Cryptocurrency in Your Portfolio: Are Pension Systems Ready to Dive In?”

VanEck, one of the investment firms featured on the panel, has received crypto investing inquiries from more than a dozen public pension funds across the country over the past few years, said Kyle DaCruz, director, digital asset product.

A Quebec pension fund invested $150 million in Celsius Network, which filed for bankruptcy protection in July.


Photo:

Andre M. Chang/Zuma Press

The association’s executive director, Art Alfaro, has called cryptocurrency “an asset class that shouldn’t be overlooked.”

“Our inclusion in our educational forums could one day be thought of as the inclusion of educational sessions on the Internet in the mid-90s, or the introduction of the iPhone in 2007, or electricity in the early 1900s,” said writes Mr. Alfaro in an e-mail.

Federal regulators are less enthusiastic. In March, the Labor Department told 401(k) that it planned to exercise extreme caution to allow participants to invest in cryptocurrency, and a senior labor official said in April that the crypto market was not ready for people’s retirement savings.

“Returns and risk are a different order of magnitude than well-regulated traditional assets,” said Gil Luria, a strategist at DA Davidson who has studied cryptocurrency for years.

Yet, Mr. Luria said, “the hunt for yield has been the sport of pension funds for some time and crypto tech assets as a whole have had such spectacular returns over the past 12 years that it is not It’s no surprise that yield hunters at least dip their toes in the water.”

Prices for bitcoin and other cryptocurrencies have plunged repeatedly since their peak in November as stocks tumbled and investors backed off on risk. Individual investors have lost their life savings, major crypto companies are laying off workers, and an estimated $2 trillion worth of cryptocurrency is gone.

The Caisse de depot et placement du Quebec, which serves more than six million workers and retirees, pulled out of Celsius after the crypto lender suspended withdrawals in June.

The CDPQ has hired a lawyer to represent it in the bankruptcy case, according to court documents. As an equity investor, he would usually side with the creditors of the crypto lender to recover any lost money.

The roughly $330 billion Canadian pension fund saw the initial investment as a way to gain exposure to a potential new wave of finance while risking little investment capital, according to a person familiar with the matter. The total investment was $150 million, the person said.

The WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam

Mr. Singh said the The Houston Fire Department fund views its cryptocurrency holdings — made through bitcoin firm NYDIG, a subsidiary of alternative asset manager Stone Ridge — as a long-term investment and intends to hold them for three to five years.

The pension fund, which serves more than 7,000 current and retired firefighters, remains interested in crypto, he said, but he is not making any additional investments at this time.

Some repo officials looked at falling crypto prices and yet saw an attractive entry point.

In May, two Virginia pension systems approved a three-year, $70 million commitment to two funds that provide short-term loans to crypto-related financial firms offering services like crypto trading. The funds are managed by VanEck and Parataxis Capital.

“Yields are more attractive right now given that some people are less willing to do it given the crypto winter we’ve been through,” said Katherine Molnar, chief investment officer of the Police Officers’ Retirement System. Fairfax County.

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The Fairfax Police Fund and its sister fund, the Fairfax County Employees Retirement System, have a total of $6.6 billion under management and approximately 30,000 beneficiaries. They hold around 4.5% and 2.5% of the assets, respectively, committed to crypto-related holdings, after quick gains on a 2018 investment.

This stake, a stake in a venture capital fund invested primarily in crypto technology, has already paid out more money than the Virginia funds set up, according to the manager, Morgan Creek Capital Management, and its book value has quadrupled. to June 30. .

Yet many remain on the sidelines, such as California’s $300 billion state teachers’ retirement system.

“The risk is quite high,” a spokeswoman said, “so we will set the bar high for investing in these opportunities.”

—Vipal Monga contributed to this article.

Write to Heather Gillers at heather.gillers@wsj.com

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