Virginia pension fund invests in criptocurrency lending

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Virginia pension fund invests in criptocurrency lending

A $6.8 billion Virginia pension fund is looking to increase its returns by investing in criptocurrency lending markets despite a crisis in the sector that has pushed several companies into bankruptcy and left retail investors with heavy losses.

The board of trustees of Fairfax County Retirement Systems have approved a plan to invest in yield farming, in which investors lend their digital token to projects in return for a fixed stream of payments.

Katherine Molnar, chief investment officer at the Fairfax County Police Officers Retirement System, said in an interview that some of the yields that you can achieve in a yield farming strategy are really attractive because some people have stepped back from that space.

After the collapse of stable coin terra, which was a popular tool for yield farming, cryptocurrencies have been at the centre of the credit crisis in digital asset markets this year.

Several major companies specializing in criptocurrency lending, including Celsius Network and Voyager, as well as the hedge fund Three Arrows Capital, have fallen into bankruptcy while scores of retail traders who invested in risky yield-farming strategies have been hit with heavy losses. Many yield-farming projects offer yields that are much higher than those available in bond markets but provide little investor protections found in traditional finance.

Molnar said that for those who are still willing to provide liquidity and decent profit seekers, they are able to earn more attractive yields because of the fact that the Fairfax system recently placed $35 mn with the new finance income fund and Parataxis Capital's digital yield 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 came after its larger Canadian peer, Caisse de d p t et placement du Qu bec, was stung by Celsius's decision to halt client withdrawals and the bankruptcy petition that followed it. CDPQ invested in the privately held group equity last year as part of a bet on the future of the technology.

Before making the decision to dip into yield farming, the $5 billion Fairfax County Employee Retirement System and the $1.8 bn Fairfax County Police Officers Retirement System had already invested in criptocurrency. The pension funds first invested $10 mn and $11 mn into the Morgan Creek Blockchain Opportunities Fund in 2019, a year after being alerted to the potential of the technology.

Molnar said that we were at a conference and that an academic who teaches a course on the topic spoke. We were 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 market, rather than in tokens. The two pension funds also made seven digital allocations covering private equity, hedge funds and now yield-farming strategies.

Andrew Spellar, Investment Chief for Fairfax County Employees, said we started in venture capital and private equity. Once we got more comfortable in the space, we started to think 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.

Molnar said we are still convicted in our original thesis. Things will bounce back and the stronger technologies will probably survive.