Institutions wishing to invest in new asset classes, such as cryptocurrencies, face many obstacles, including their size, the risk parameters set by their boards of directors, the history of performance and the potential stigma of being wrong.
But public pension funds and other big investors, including insurance companies, are dabbling in crypto and new research shows they are having some success, at least in the short term. Those who started investing capital in transparent exchange-traded funds that track cryptocurrencies outperformed their peers by 2.8% on an annualized basis between March 2018 and March 2020, according to the study.
According to an article published Nov. 17 by Luke DeVault, who teaches in the finance department at the College of Business at Clemson University, and Kainan Wong of the College of Business and Innovation at the University of Toledo, the asset class could report a “small growing group of diversified investors.”
The paper comes at a time when some institutions are finally getting into cryptocurrency – and others are sitting on the sidelines. For example, the Houston Firefighters’ Relief and Retirement Fund said in October that it had made its first investment in Bitcoin and Ethereum, albeit a small one. The pension invests 0.5 percent of its $ 5.2 billion portfolio, or $ 26 million.
Meanwhile, in a meeting on November 16, Jagdeep Bachher, chief investment officer at the University of California, told his board that the fund is not yet ready to invest in cryptocurrency. .
“I leaned on the younger ones to see if they were experts, and their advice was to stay away,” he said. He added: “Frankly, I just don’t understand enough that I’m willing to put dollars at risk. [into it] on behalf of UC … but that doesn’t mean we can ignore the technology.
UC and HFRRF are just two examples of the disparate approaches major investors are taking to the nascent – and controversial – asset class. Serious research advocating to invest, or avoid, crypto has proliferated in recent years. This latest article, however, suggests that investors waiting for more clarity on the cryptocurrency might be missing out.
To test if this is the case, DeVault and Wong used 13F Regulatory Deposits to track owners of three grayscale trusts that give investors exposure to Bitcoin and Ethereum through a traditional vehicle, and three blockchain ETFs, including Siren. Nasdaq NexGen Economy ETF, First Trust Indxx Innovative Transaction & Process ETF, and Amplify Transformational Data Sharing ETF. They also analyzed the portfolios of investors who held stocks that invested directly in cryptocurrencies, cryptocurrency mining, and blockchain development.
They measured these investments over two years – from March 2018 to March 2020, covering 6,041 institutions that report their holdings through 13F statements. Their data set consisted mostly of independent investment advisers, but insurance companies, investment firms and public pension funds were also included in the analysis.
The researchers wrote that corporate pension funds and their dataset endowments had not invested in crypto assets. But it does not take into account all the crypto-adjacent assets, in which endowments and foundations have invested.
For example, the Washington University Investment Management Company made a ‘super small investment’ in crypto in 2014 and allocated capital to blockchain-related lenders or gaming companies, Institutional investor Previously reported. Meanwhile, Duke University Endowment is also said to have invested in Coinbase, which research firm Markov Processes International said could have contributed up to 10% of the 56% endowment return in 2021.
According to the document, crypto assets can play multiple roles in a portfolio – investors can use them to increase returns or improve diversification. While these assets tend to produce high expected returns and low correlation with other assets, the authors acknowledge that previous research has shown that there is a “large amount of risk” in the asset class. But according to the findings of this article, the risk is well worth it.
“Institutions investing in crypto assets outperform those that don’t, supporting the idea that sophisticated institutions invest in crypto assets,” they wrote. “Additionally, institutions investing in crypto assets hold portfolios comprised of securities with medium beta and lower return volatility, suggesting that crypto assets are sought after by managers who place a high value on diversification. ”