A $6.8bn Virginia pension fund is looking to boost its returns by investing in crypto lending markets despite a crisis in the sector that has pushed several companies into bankruptcy and left retail investors with heavy losses.
The Fairfax County Retirement Systems recently gained approval from its board of trustees to begin investing in “yield farming” in which investors lend out their digital tokens to crypto projects in return for a fixed stream of payments.
“Some of the yields that you’re able to achieve in a yield farming strategy are really attractive because some of the people have stepped back from that space,” Katherine Molnar, chief investment officer of the Fairfax County Police Officers Retirement System, said in an interview.
Crypto lending has been at the centre of this year’s credit crisis in digital asset markets after the $40bn collapse of stablecoin terra, which was a popular tool for yield farming, sent shockwaves across the sector.
Several major companies specialising in crypto lending, including Celsius Network and Voyager, as a well as hedge fund Three Arrows Capital have fallen into bankruptcy while scores of retail traders who invested in risky yield-farming strategies were hit with heavy losses. Many yield-farming projects offer yields that are much higher than those available in bond markets but provide few investor protections found in traditional finance.
Molnar said that “for those that are still willing to provide liquidity, decent profit seekers, they’re actually able to earn more attractive yields at the moment”.
The Fairfax system recently placed $35mn each with the 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 entities.
The Fairfax system’s investment in these crypto yield funds comes after its larger Canadian peer, Caisse de dépôt et placement du Québec, was stung by Celsius’s decision to halt client withdrawals and the bankruptcy petition that followed it. CDPQ had invested in the privately held group’s equity last year as part of a bet on the future of blockchain technology.
The $5bn Fairfax County Employee Retirement System and the $1.8bn Fairfax County Police Officers Retirement System had already been investing in crypto before making the decision to dip into yield farming. The pension funds first invested $10mn and $11mn, respectively, into the Morgan Creek Blockchain Opportunities Fund in 2019, a year after being alerted to the potential of the technology.
“We were at a conference and we heard an academic who teaches a course on the topic speak,” Molnar said. “We were really intrigued by the promise of the technology and its products.”
The pension managers said they undertook extensive due diligence before making their first allocation, with the investment chiefly in the companies that provide the plumbing for the crypto market rather than in tokens. The two pension funds then made a further seven digital allocations, covering private equity, hedge funds and now yield-farming strategies.
“We started in venture capital and private equity,” said Andrew Spellar, investment chief for Fairfax County Employees. “But once we got more comfortable in the space, we started to think a bit broader about how we might be able to use strategies in digital assets in other parts of the portfolio.”
The systems said their initial investments in the digital asset sector were expected to take a hit of around 50 per cent from this year’s market turmoil, but that would still leave the investment up 350 per cent.
“We are still convicted in our original thesis,” said Molnar. “Things will bounce back and the stronger technologies will probably survive.”