Virginia pension funds invest in crypto loans to boost returns
A $6.8 billion Virginia pension fund is looking to boost returns by investing in crypto-loan markets despite a crisis in the sector that has pushed several companies into bankruptcy and left private investors with big losses.
Fairfax County Retirement Systems recently received approval from its board of trustees to begin investing in “yield farming” where investors lend their digital tokens to crypto projects in return for a fixed stream of payments.
“Some of the returns you can get in a yield farming strategy are really attractive because some of the people have retired from that area,” said Katherine Molnar, chief investment officer of the Fairfax County Police Officers Retirement System. an interview.
Cryptolending has been at the center of this year’s credit crunch in digital asset markets after the $40 billion collapse of stablecoin terra, which was a popular yield-farming tool, sent shockwaves across the sector.
Several major companies specializing in crypto-lending, including Celsius Network and Voyager, as well as hedge fund Three Arrows Capital have gone bankrupt, while dozens of retail traders who invested in risky yield-farming strategies were hit with heavy losses. Many yield schemes offer returns that are much higher than those available in the bond markets, but offer few investor protections found in traditional finance.
Molnar said that “for those who are still willing to provide liquidity, decent profit seekers, they are actually able to earn more attractive returns at the moment”.
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The Fairfax system recently placed $35 million each with Parataxis Capital’s digital return fund and VanEck’s new financial income fund, which aim to provide income to investors through short-term digital asset lending arrangements.
Fairfax System’s investment in these crypto fixed income funds comes after its larger Canadian counterpart, Caisse de dépôt et placement du Québec, was stung by Celsius’ decision to halt customer withdrawals and the bankruptcy filing that followed it. CDPQ had invested in the privately held group’s equity last year as part of a bet on the future of blockchain technology.
The $5 billion Fairfax County Employee Retirement System and the $1.8 billion Fairfax County Police Officers Retirement System had already invested in crypto before making the decision to enter yield farming. The pension funds first invested $10 million and $11 million, respectively, in the Morgan Creek Blockchain Opportunities Fund in 2019, a year after being alerted to the technology’s potential.
“We were at a conference and we heard an academic who teaches a course on the subject speak,” Molnar said. “We were very intrigued by the promise of the technology and its products.”
The pension managers said they did extensive due diligence before making their first allocation, with the investment mainly in the companies that provide plumbing for the crypto market rather than in tokens. The two pension funds then made seven more digital allocations, covering private equity, hedge funds and now yield-farming strategies.
“We started with venture capital and private equity,” said Andrew Spellar, chief investment officer for Fairfax County Employees. “But as we got more comfortable in the space, we started to think a little more broadly about how we might be able to apply strategies in digital assets to other parts of the portfolio.”
The systems said their initial investments in the digital asset sector were expected to take a hit of around 50 percent from this year’s market turmoil, but that would still leave investments up by 350 percent.
“We are still condemned in our original thesis,” Molnar said. “Things will bounce back and the stronger technologies will probably survive.”
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