Rehashed - #28 Yale Endowment Paves Way for Institutional Allocators
The “Warren Buffet of Endowments” makes a Bet on Crypto
This week, we were graced with the news that following their investment in a16z’s crypto fund, Yale’s (USD) $30 billion endowment fund also invested in a newly raised crypto fund, Paradigm. The investment marks the unity of talented crypto investors, Fred Ehrsam (founder of Coinbase), Matt Huang (ex. Sequoia Capital) and Charlie Noyes (ex. Pantera) with one of the most successful U.S. college endowments. Under David Swensen’s (Yale Endowment CIO) leadership, Yale has averaged an 11.8% return over the past 20 years. More importantly, however, the investment marks the first leap of faith in the crypto world by an established endowment fund.
To date, only a small segment of the traditional institutional investment crowd have invested in cryptocurrencies. Leading the charge are nimble family offices and venture capital funds who have the flexible structure and risk appetite to take on such an investment. However, the majority of institutional money is still sitting on the sidelines with many remaining apprehensive of cryptoasset investment. Although the risk-return profile of cryptoassets can be very attractive and adds diversification to a traditional portfolio, there are many factors that discourage investment from large institutions.
Cryptoasset investment creates all sorts of operational headaches for fiduciaries. Custody is the very obvious issue, with accounting, tax and regulatory question marks also hovering over the space. Additionally, portfolio managers (PMs) typically face significant career risk in proposing investment in cryptoassets. If all goes well, PMs would receive a pat on the back, however getting caught in the recent bear market, for example, could lead to destructive returns and the firing of those responsible. With time-tested investors such as David Swenson making such investments, more portfolio managers are likely to feel more comfortable in making such investments.
Asset Reallocation in Institutional Portfolios
A strong argument has been made that we will begin to see a rotation from traditional asset classes to the crypto space in institutional portfolios. The chart below depicts the value proposition of each type of cryptoasset and how that may translate from traditional allocations.
Source: Meltem Demirors, Athena Capital
In aggregate, U.S. college endowments hold about (USD) $550 billion in assets. If endowments are targeting a high allocation to alternative investments (almost 60% of Yale’s assets in fiscal 2019 are targeted for alternative investments including venture capital, hedge funds and leveraged buyouts), we are likely to see more endowments follow Yale’s lead.
Endowments aren’t the only type of fund that may consider asset reallocation to crypto. Sovereign wealth funds and pension funds account for a significant chunk of the institutional investor landscape. We’re talking trillions of dollars here. The top 5 sovereign wealth funds have over (USD) 3.6 trillion in assets under management. CalPERS, a U.S. national pension fund, alone, has over (USD) $326 billion in assets under management. If even a very small percentage of this capital is rotated into cryptoassets, we can expect significant upside.
Positive Developments for both Institutional and Retail Crowd
Note that Yale’s bets on Paradigm and a16z’s crypto fund does not translate into a direct injection into the liquid crypto markets; a16z’s fund is primarily focussed on early-stage venture investments that are likely to be in the form of both equity and token investment (with prolonged lock-ups). Paradigm offers a little more exposure to the liquid markets, comprising of 25% early stage VC and 75% late stage investments including liquid protocols. Regardless, this a big deal on the signalling front.
“To be clear, this is not huge in the sense that we'll see funds marketing buying bitcoin back to 20k. But it's huge in the signal that it sends to other allocators: ‘it's okay people, papa bear is buying bitcoin, too.’ ” - @cryptorae
Developments in the institutional world aren’t alone - products to engage the retail market are also expanding. Circle have just released “Collections,” a series of thematic investments around Platforms, Payments, and Privacy. These new additions will complement their “Buy the Market” product which is the investment product of choice for over 30% of their user base. Last week, Coinbase announced “bundles,” a similar offering whereby users can purchase an index of Coinbase’s five supported cryptocurrencies. Lastly, Abra has just announced a token which offers exposure to the top ten cryptocurrencies by market capitalization with a monthly rebalance. Each of these products condenses a handful of cryptocurrencies into one easy investment vehicle, which will allow new retail adopters to gain exposure to the broader crypto market. With prices down ~80% from market highs, this is not bad timing for new investors to be getting a foot in the door. Exciting times ahead.
In the News
Passengers refusing ‘digital search’ at the New Zealand border (involves surrendering laptop and phone passwords) now face a $5000 fine and their electronic devices seized by New Zealand Customs according to new rules that went into effect this week. Various other countries can demand access to electronic devices but the new law was believed to be the first time providing passwords had been specifically mentioned in legislation. Of the 6.6 million international visitors to NZ in 2017, 537 electronic devices were searched. A slightly biased sample, but judging by crypto-twitter’s sentiment, such a move could have serious effects on NZ business and tourism:
Institutions overwhelmingly assert that bitcoin has seen a bottom while Twitter users say it has more room to fall, according to a Fundstrat survey.
Coinbase is in talks to raise money at a (USD) $8 billion valuation: $250 million would buy out existing investors and an additional $250 million would go towards the company.
Crypto exchange Gemini has obtained insurance coverage for the digital assets it holds in custody.
New amendments filed by the SEC suggest that decisions on a number of Bitcoin ETF proposals can be expected after October 26, 2018. They have invited interested parties to file statements in support or opposition before this deadline.
Oct 12 - Blockworks Conference, Auckland
29 December - Deadline for VanEck SolidX ETF (can be extended to final deadline of Feb 27, 2019)
As always, thanks for joining - see you next week for Rehashed.
View previous issue: Rehashed - #27 Cryptoassets: Risk On vs. Risk Off?
View next issue: Rehashed #29 Crypto Continues to be an Event-Driven Market
About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.