Here’s How Institutional Investors’ Bets on Crypto Are Performing

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Institutions that want to invest in new asset classes, such as cryptocurrencies, face plenty of barriers, including their size, risk parameters set by their boards, performance history, and the potential stigma of being wrong.

But public pension funds and other big investors, including insurance companies, are dipping their toes into crypto and new research shows they’re having some success — at least in the short term. Those that have started to put capital to work in transparent exchange-traded funds tracking cryptocurrencies have outperformed their peers by 2.8 percent on an annualized basis between March 2018 and March 2020, the research found.  

According to a paper published on November 17 by Luke DeVault, who teaches in the department of finance at Clemson University’s College of Business, and Kainan Wong of the University of Toledo’s College of Business and Innovation, the asset class may be paying off for a “small but growing” group of diversified investors.  

The paper comes at a time when some institutions are finally taking the plunge into cryptocurrencies — and others remain on the sidelines. For instance, 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 is investing .5 percent of its $5.2 billion portfolio, or $26 million. 

Meanwhile, at a November 16 meeting, Jagdeep Bachher, chief investment officer at the University of California, told his board that the fund isn’t ready yet to invest in cryptocurrency.  

“I leaned on the younger staff to see if they are experts, and their advice was to stay away,” he said. He added: “Candidly, I just don’t understand it enough that I’m willing to put at-risk dollars [into it] on UC’s behalf… 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 arguing to invest, or to avoid, crypto has proliferated in recent years. This latest piece, however, suggests that investors waiting for more clarity on cryptocurrency could be missing out.  

To test whether this is the case, DeVault and Wong used 13F regulatory filings to track the owners of three Grayscale trusts that offer 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 that held stocks that directly invested in cryptocurrencies, cryptocurrency mining, and blockchain development.  

They measured these investments over two years — March 2018 through March 2020, covering 6,041 institutions that report their holdings via 13F filings. Their dataset primarily included independent investment advisors, but insurance companies, investment companies, and public pension funds were also included in the analysis.  

The researchers wrote that the corporate pension funds and endowments in their dataset did not invest in crypto assets. But it doesn’t account for all crypto-adjacent assets, some of which endowments and foundations have invested in.   

For instance, the Washington University Investment Management Company made a “super tiny investment” in crypto back in 2014 and has allocated capital to lenders or blockchain-related gaming companies, Institutional Investor previously reported. Meanwhile, the Duke University Endowment has also reportedly invested in Coinbase, which research firm Markov Processes International posited could have contributed up to 10 percent of the endowment’s 56 percent return in 2021.   

According to the paper, crypto assets can play multiple roles in a portfolio — investors can use them either to increase returns or improve diversification. While these assets tend to produce high expected returns and low correlation to other assets, the writers recognize that prior research has shown that there is a “great deal of risk” in the asset class. But according to this paper’s conclusions, the risk is worth it. 

“Institutions investing in crypto assets outperform those institutions who do not, supporting the notion that sophisticated institutions invest in crypto assets,” they wrote. “Moreover, institutions investing in crypto assets hold portfolios consisting of securities with lower average beta and return volatility, suggesting that crypto assets are pursued by managers that place a premium on diversification.”