If there is one thing that crypto enthusiasts can agree upon, it is that valuations will soar in Crypto-Land when institutional investors begin shifting capital into the space in a significant way. To date, institutional participation in digital assets can best be described as modest, but a new research paper has revealed that endowment funds have been more active in the crypto sector than was ever expected and considerably more active than other institutional players like banks, hedge funds, and pension funds.
Global Custodian and its sister publication The Trade Crypto, in partnership with blockchain security company BitGo, conducted the study, which surveyed over 150 endowment funds. Nearly 90% of the survey participants were resident in the United States, but there were also several funds located in Canada and the UK, as well. The surprising statistic was that 94% of the group “took part in crypto-related investments in 2018”. Compared to two pension funds in Virginia, which have been reported in February as to be considering being the anchor members of a venture capital digital asset fund, this activity rating in endowments is, in a word, startling.
Whereas the top 300 pension funds in America manage in excess of $6 trillion in assets, comparable figures for endowment funds are just under $1 trillion by recent estimates. These funds are typically the result of major donations to non-profit organizations that have been organized to achieve a specific purpose in the community, primarily as a major financial support vehicle for universities. The Top Ten largest university funds in the U.S. have over $180 billion in assets under management. The running joke about Harvard is that it is a $37 billion endowment fund with a university attached.
The reasons why endowments have been more active in the crypto space are varied. These funds are private and can be more aggressive in setting return targets and choosing allocations to new and innovative asset classes. For example, Yale has a $30 billion fund that has earned an average 11.8% annual return for the past 20 years. Fund managers typically set 10%, as a target for annual fund performance. It is no surprise that fund managers in this sector would appreciate the long-term return aspects of crytocurrencies and allocate a portion of their more speculative asset pools to cryptos.
The research paper confirms these thoughts, as well:
Feedback from respondents showed that they find the space ‘exciting’ and ‘interesting’ as they appear cautiously optimistic about the long-term future of their crypto-related investment allocations. Given the nature of their investments and the long-term view to keep universities financially viable, cryptocurrencies and funds seem to fit their modus operandi, which will give confidence to those platforms hoping the asset class will be around and grow in the years to come.
Participation expectations and positions taken by these managers vary across the map, as evidenced by these other results from the survey questioning:
- How many expect their allocation to decrease in 2019, based on their experience to date? 7%
- How many expect their allocation to increase over the next 12 months? 55%
- How many expect their allocation to stay the same in 2019? 38%
- How many believe the endowment sector’s allocation to crypto-related investments will either increase or stay the same in 2019? 94%
- How many of the investments were direct into Bitcoin and other crypto assets? 54%
- How many were through a fund? 46%
- Respondents who label “regulations” as a top-3 concern: 75%
These managers also noted that investing in the crypto space can be “scary” and “too volatile”, the same reasons given by many other institutional players that presently sit on the sidelines, waiting for a more stable and regulated crypto environment. Pension funds, due to their widespread ownership, are generally restricted by law to be extremely conservative, but banks, hedge funds, and wealthy individual investors are another story. These managers have much more discretion with their respective portfolios.
What is holding these groups back? According to a recent Forbes report:
Traditional asset managers – the likes of BlackRock, Vanguard and Pimco – remain on the sidelines due to a lack of regulatory clarity across the world’s major markets. This is not to say their interest has not been piqued, but volatility, liquidity concerns and an unfamiliar market infrastructure render the new asset class relatively untouchable, while regulatory uncertainty also persists.
BlackRock, the largest asset manager in the world with $6 trillion under management, could soon be joining the crypto fold. Forbes added that:
As news circulates that indexing giant BlackRock is reorganizing itself with an emphasis on higher-fee alternative assets, a few are beginning to believe that bitcoin could ultimately find its place among these nontraditional assets.
Up to now, the belief has been that large institutional players were only dabbling with digital assets by way of the OTC markets afforded them by their traditional brokers. This study reveals that the “dam” holding back the often-hoped-for flood of institutional capital may be showing signs of a few significant cracks, just one more bullish fundamental factor for cryptos.