Pension funds making crypto investments seen as risky by observers

TL;DR Breakdown

  • Pension funds and conventional investors are providing funds to a brokerage firm, assisting hedge funds in making more substantial investments in cryptocurrency assets.
  • Pension funds are entering the crypto space, showcasing the latest trend among pension funds to explore avenues for enhancing their returns.

Description

Pension funds and conventional investors are providing funds to a brokerage firm, assisting hedge funds in making more substantial investments in cryptocurrency assets. Among the supporters of Hidden Road, a crypto prime broker, are retirement schemes, including that of Lockheed Martin, a US defense contractor. This financial backing, usually sourced from banks in conventional markets, … Read more

Pension funds and conventional investors are providing funds to a brokerage firm, assisting hedge funds in making more substantial investments in cryptocurrency assets. Among the supporters of Hidden Road, a crypto prime broker, are retirement schemes, including that of Lockheed Martin, a US defense contractor. This financial backing, usually sourced from banks in conventional markets, is now being extended by these banks.

Bridging traditional investments and crypto

Hidden Road, headquartered in London, garnered a $50 million equity investment from entities like Citadel Securities led by Ken Griffin, and cryptocurrency exchange Coinbase in the previous year. The firm has assumed a pivotal role in connecting traditional investors with digital assets, serving as a vital link. Moreover, it offers a potential lifeline to the cryptocurrency market, which is grappling with reduced trading activity and leverage due to various issues, including the downfall of the FTX exchange.

Andrew Urquhart, who holds the position of a finance and financial technology professor at Henley Business School, emphasized the substantial risk associated with such investments, stating that if a pension fund were to venture into the realm of cryptocurrencies, it would raise significant concerns.

According to Cyrus Pocha, a partner at Freshfields, raising funds from external investors is unconventional. When a prime broker functions in this manner could imply that they lack a vested interest in the repayment process, as stated by Pocha.

The cryptocurrency markets have experienced a challenging period marked by significant setbacks, including the collapse of the FTX exchange and regulatory actions against Coinbase and Binance in the US. Notably, the trading volumes for spot cryptocurrencies have plummeted by over 50%, dropping from $1.2 trillion in the corresponding period last year to $515 billion in July, as reported by CCdata.

Pension funding firms getting into crypto

Lockheed Martin’s pension plan and other similar entities are now entering the crypto space, showcasing the latest trend among pension funds to explore avenues for enhancing their returns. While pension funds are venturing into digital assets, some have suffered losses, underscoring the inherent risks associated with the cryptocurrency market. Instances include Canada’s Ontario Teachers’ Pension Plan losing its investment in the FTX crypto exchange and CDPQ facing losses with lender Celsius.

Prime brokerage is inherently risky, even for major banks. For example, Credit Suisse incurred a substantial $5.5 billion loss on its balance sheet due to the Archegos family office collapse, contributing to the bank’s eventual downfall. “It’s a very tough business,” commented Harry Jho, the founder of the law firm Harry Jho LLC, which specializes in prime brokerage, highlighting the need for comprehensive credit risk assessment when providing full financing.

An investor who interacted with Hidden Road described it as an intensified form of prime broking, likening it to “prime broking on steroids.” Nonetheless, concerns exist about relying on external capital, and certain executives are apprehensive about Hidden Road’s size. While the firm’s balance sheet is in the hundreds of millions, it falls short of the billions typically held by banks. This discrepancy raises concerns about its ability to withstand significant market events. Some fear that in such cases, Hidden Road might require additional capital at short notice from its investors.

Nonetheless, the cryptocurrency industry has encountered the challenging reality that prime broking services can be precarious. Over the past year, Digital Currency Group’s Tradeblock ceased operations, and the lending division of Genesis, another prime broker, declared bankruptcy.

Gautam Chhugani, senior analyst of global digital assets at Bernstein, remarked that the landscape of crypto prime brokerage and institutional broking is notably sparse. However, he highlighted the complexities of managing assets like bitcoin and other tokens due to their inherent volatility. He also noted that various entities have experimented with prime broking models in diverse ways, with some experiencing failures.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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