Crypto critics abound at the near-term prospects for cryptocurrencies, but they seem to fade away when a long-term view is taken. Which institutional investor is focused almost entirely on the long-term perspective? The answer is pension and endowment funds, which have shied away from cryptos for a variety of reasons. Now Cambridge Associates, a major consulting firm that advises institutions managing over $300 billion, is suggesting that its clients seriously consider cryptos for the long-term.
In its last research note distributed to its clients, Cambridge stated: “Despite the challenges, we believe that it is worthwhile for investors to begin exploring this area today with an eye toward the long term. Though these investments entail a high degree of risk, some may very well upend the digital world.”
If any fund was actively considering a crypto investment, things changed as Crypto Winter wreaked its vengeance on valuations. The Top Ten performers lost 80% of their value, while smaller programs lost more or shut down altogether. Reasons for not investing, however, go much deeper. Pension funds tend to have very strict rules set by the government and by their executive committee that define what is a permissible investment in the first place. There would need to be agreement at a high level in order to proceed. The lack of regulation, the pervasiveness of fraud, and a reputation for hiding ill-gotten gains have all been deterrents, as well.
Having already reviewed these drawbacks, Cambridge still comes away believing that, from a long-term perspective, cryptos offer returns that cannot be ignored. Their first recommendation is that the funds spend “a considerable amount of time learning about the space.” The second bit of advice has to do with reviewing the avenue to be taken to secure a position in the market, whether by participating in a private, illiquid venture capital fund or buying directly into the market.
Not all pension and endowment funds have steered clear of crypto investments. The actual participation has been sporadic, but a recent major news item was that two Fairfax County funds in Virginia had made the plunge. The route chosen for entry was to be the “anchor investors in a new $40 million venture-capital fund”.
Anthony Pompliano, the founder of Morgan Creek Digital (MCD), an affiliate of the investment manager Morgan Creek Capital Management LLC, gave little in the way of details, but he did note that: “There’s a belief in the institutional world that if the industry will be around for a long time, it will be very valuable. 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.”
How much of an investment potential is the pension industry? Investments by any fund would necessarily form a small portion of the fund’s “speculative” pool, but a small percentage of the $6 trillion managed by the top 300 pension funds in America would still be significant, and then there remains the rest of the world to consider also.
Cambridge concluded: “The dramatic declines that swept across the crypto space raised questions about the future of these assets and the blockchain technology that underpins them. Yet, in looking across the investment landscape, we see an industry that is developing, not faltering.”