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Virginia pension funds are investing in crypto yield farming despite the recent turmoil

Virginia’s Fairfax County Retirement Systems will invest its $6.8 billion retirement fund in cryptocurrency yield farming to boost returns, the Financial Times reported Aug. 4.

According to the news outlet, the Fund for Pension Schemes recently received approval from its Board of Trustees for the move.

Katherine Molnar, chief investment officer for the Fairfax County Police Officers Retirement System, told FT in an interview:

“Some of the returns you can get from a yield farming strategy are really attractive because some people have pulled out of that space.”

Crypto yield farming refers to lending digital assets for a payment stream. But Virginia County’s decision comes at a time when the crypto lending market has been marred by turmoil and a string of corporate bankruptcies in space.

Molnar is said to have said:

“For those still willing to provide liquidity, decent profit seekers, they may actually have more attractive yields at this time.”

According to the FT report, the Fairfax system recently invested $35 million each in Parataxis Capital’s Digital Yield Fund and VanEck’s new Finance Income Fund. VanEck’s financial income fund aims to provide investors with income through short-term loan agreements with digital asset companies.

But this isn’t the first time Fairfax Country Pension Schemes has invested in the crypto market. According to the FT report, the $5 billion Fairfax County Employee Retirement System and the $1.8 billion Fairfax County Police Officers Retirement System had $10 million and $11 million poured into Morgan Creek, respectively, in 2019 Blockchain Opportunities Fund invests.

The pension managers said they conducted extensive due diligence prior to their initial investment in the crypto space. The investments were mostly in the companies rather than the tokens, the FT reported.

The two pension funds then moved on to investing in private equity, hedge funds and eventually yield farming projects. Andrew Spellar, Investment Chief for Fairfax County Employees said:

“We started with venture capital and private equity.

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 two pension funds are expecting a 50% loss in their initial crypto investments due to the market turmoil, but that would still see the funds soar by 350%, the FT reported.

Molnar said she’s still confident that crypto investing was a good bet and expects things to bounce back as stronger technologies take hold.

Turmoil in the crypto lending market

The crypto lending market came under tremendous pressure after the TerraUSD (USTC) collapse in May. The falling crypto prices along with inter-corporate lending and a lack of proper risk hedging have led to a number of bankruptcies including Celsius Network, Voyager Digital and hedge fund Three Arrows Capital. The rapid and sudden demise of these lenders has left thousands of retail lenders in the lurch.

In addition, even non-bankruptcy lenders are struggling with liquidity, including Babel Finance and Zipmex. Singapore-based Vauld recently obtained a three-month moratorium offering protections from creditors in an attempt to resolve the situation. Several others have also suspended payouts, while retail customers are bearing the brunt of the losses.

Fairfax County’s investment in the crypto lending market comes after Canada-based Caisse de dépôt et Placement du Québec (CDPQ), an institutional investor that manages several public pension funds, took a hit when Celsius halted withdrawals and subsequently filed for bankruptcy. CDPQ had made a US$150 million equity investment in Celsius in October 2021.

In April 2022, Fidelity, one of the largest providers of 401(k) pension plans in the US, announced that it would allow participants to invest part of their retirement savings portfolio in Bitcoin.

But in March, the U.S. Department of Labor warned employers and supervisors to “exercise extreme caution” while adding cryptocurrencies to 401(k) pension plans.

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