Amid the FTX fallout, the public pension fund is defending its big bet on crypto-related holdings

By Eleanor Laise

‘We understand it’s controversial’: Critics cite potential risks for retirees as pension schemes seek to boost returns.

As investors scramble to gauge the fallout from the bankruptcy of cryptocurrency exchange FTX and the general price drop in bitcoin and other digital currencies, a public pension fund stands by its heavy exposure to crypto-related holdings.

The Fairfax County Police Officers Retirement System, a defined-benefit pension plan covering law enforcement officers in sprawling northern Virginia County, has invested over 7% of its assets in crypto-related holdings, spread across the fund’s venture capital and hedge fund holdings, according to a person familiar with the fund and “yield farming” by funds providing short-term loans to crypto-related businesses.

“I was really happy with how we thought about it and how we approached crypto-related investments,” said Katherine Molnar, the fund’s chief investment officer, during a panel discussion hosted by the blockchain advocacy Chamber of Digital Commerce just days ago after FTX filed for bankruptcy.

As for the FTX debacle, “while it causes volatility and is admittedly stressful, washing out weak players or potentially unsuitable players — is ultimately a healthy thing,” Molnar wrote in mid-November in an email verified by MarketWatch to a consultant who asked about the pension fund’s crypto exposure. “Our underlying investment thesis — that innovation surrounding blockchain technology is a future high-growth field — hasn’t changed,” Molnar wrote.

Molnar oversees a fund that managed $1.8 billion in assets for the benefit of more than 2,700 active and retired participants as of mid-2021, according to the fund’s most recent annual report. It had no direct exposure to FTX, Molnar wrote in the email, outside of market volatility.

Some investment and regulatory compliance experts are less optimistic about the idea of ​​public pensions dipping into the crypto ecosystem. John Reed Stark, the advisor who interviewed Molnar about the Fairfax Police Pension’s crypto-related holdings, is a crypto critic and former head of the Securities and Exchange Commission’s Office of Internet Enforcement. “To me, this is perhaps the most reckless investment” made by a public fund in decades, Stark wrote in a LinkedIn post after his email exchange with Molnar. “FTX contagion has just started to spread,” Stark told MarketWatch. His interpretation of Molnar’s position, he said, is that “you’re standing in a burning building and you think everything’s going to be fine.”

Concerns about digital asset contagion rose Monday as crypto lender BlockFi filed for bankruptcy protection. Bitcoin, the most traded digital currency, is down more than 70% since its all-time high a year ago.

In addition to the Fairfax Police Fund, other public pension funds have invested in crypto-related holdings, although their allocations are generally small. A sister fund to the Fairfax Police Pension Fund, the Fairfax County Employees Retirement System, holds similar crypto-related investments. The Houston Firefighters’ Relief and Retirement Fund, meanwhile, announced late last year that it was investing in Bitcoin and Ether.

Defined benefit pensions “are too important for participants to use valuable resources to engage in these risky strategies,” Russell Kamp, chief executive of investment management firm Ryan ALM, told MarketWatch. “We need to get back to basics and focus on the promise” made to participants in those plans, he said.

Like the police pension fund, the Fairfax County Employees Fund has no direct exposure to FTX, Chief Investment Officer Andrew Spellar said at the Chamber of Digital Commerce event. “We understand it’s controversial,” he said, adding that recent events “are obviously not helping. But it doesn’t change the underlying investment thesis for us.” The Houston fund did not respond to requests for comment.

Earlier this year, the U.S. Department of Labor warned that 401(k) plans should “exercise extreme caution” before considering adding cryptocurrency options to their investment menus. However, public pension plans are largely governed by state and local laws.

Experts say the impact of the crypto revolution on public pension funds may not be fully understood for some time, as funds often invest through private vehicles with holdings that are difficult to value.

The Fairfax Police Department Pension Fund first got involved in crypto-related investments about 4.5 years ago, Molnar said at the Chamber of Digital Commerce event, noting that the pension system is underfunded and unlikely to meet its return targets on traditional stocks and bonds will reach. Some trustees were skeptical about the move, she said. “I manage money for police officers, and there were definitely concerns about ‘is this money laundering?'” she said, adding that the vote to approve the investment “wasn’t unanimous.” The long-term promise of blockchain technology, she said, adding that over time “virtually everything will go digital,” from bonds and mortgages to driver’s licenses and medical records.

The fund’s target weight for digital assets is 4.75%, but the allocation has grown to over 7% due to strong early performance, according to the person familiar with the fund. “No doubt there will be domino effects,” said this person, but the collapse could also speed up regulation in this area, which would ultimately be positive for the industry.

The fund has made nine crypto-related investments so far and has had to evaluate some red flags, Molnar said during the panel. “The entire ecosystem is new,” she said. “The accountant of a fund you’re looking at – you may not have heard of that accountant before.” In any other area, she said, “you probably wouldn’t invest in a manager who has an accountant that you’ve never heard of before.” She added, “We all have to have an open mind.”

– Eleanor Laise

(ENDS) Dow Jones Newswires

11/29/22 0902ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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