A $6.8 billion Virginia pension fund is looking to boost returns by investing in crypto credit markets amid an industry crisis that has bankrupted several companies and caused heavy losses for retail investors.
Fairfax County Retirement Systems recently received approval from its board of trustees to invest in “yield farming,” where investors lend their digital tokens to crypto projects in exchange for a fixed payment stream.
“Some of the returns you can get from a yield farming strategy are really attractive because some of the people have retired from that space,” Katherine Molnar, chief investment officer of Fairfax County’s Police Officers Retirement System, said in an interview .
Crypto lending has been at the center of this year’s credit crunch in digital asset markets after the collapse of $40 billion worth of stablecoin Terra, which has been a popular tool for yield farming, sent shockwaves across the sector.
Several large companies specializing in crypto lending, including Celsius Network and Voyager, and hedge fund Three Arrows Capital have gone bankrupt, while scores of retailers investing in risky yield farming strategies have suffered heavy losses. Many yield farming projects offer yields much higher than those available in bond markets, but offer little of the investor protection found in traditional finance.
Molnar said that “for those still willing to provide liquidity, decent profit seekers can actually find more attractive yields at this time.”
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The Fairfax system recently placed $35 million each in Parataxis Capital’s Digital Yield Fund and VanEck’s new Finance Income Fund, which aims to provide income to investors through short-term lending arrangements with digital asset companies.
The Fairfax system’s investment in these crypto yield funds comes after its larger Canadian competitor, Caisse de dépôt et Placement du Québec, was struck by Celsius’s decision to halt customer withdrawals and the subsequent bankruptcy filing. 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 Pension Scheme and the $1.8 billion Fairfax County Police Officer Pension Scheme had already invested in crypto before making the decision to dive into yield farming. The pension funds made their first investment of $10 million and $11 million, respectively, into the Morgan Creek Blockchain Opportunities Fund in 2019, a year after being alerted to the technology’s potential.
“We were at a conference and overheard an academic who teaches a course on the subject,” Molnar said. “We were really intrigued by the promise of the technology and its products.”
The pension administrators said they conducted extensive due diligence prior to their initial allotment, with the investment primarily invested in the companies rather than tokens that provide the installations for the crypto market. The two pension funds then made an additional seven digital allocations, covering private equity, hedge funds, and now yield farming strategies.
“We started with venture capital and private equity,” said Andrew Spellar, investment chief for Fairfax County Employees. “But as we became more comfortable in that space, we started to think a little more broadly about how we could use digital asset strategies in other parts of the portfolio.”
The systems said their initial investment in the digital asset sector was expected to be impacted by about 50 percent from this year’s market turmoil, but that would still see investment grow by 350 percent.
“We still believe in our original thesis,” Molnar said. “Things will recover and the stronger technologies will likely survive.”
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