The German pension fund for doctors in the state of North Rhine-Westphalia, Nordrheinische Ärzteversorgung (NAEV), has made its first foray into the crypto space following a two-year test period.
Over the past few years, the first-pillar pension fund has explored cryptocurrency by testing two strategies, investing a maximum 0.1% of total assets or around €17m. The total allocation has since increased to no more than 0.5%, or €85m, following the conclusion of the tests, IPE understands.
Chief investment officer Bernd Franken told IPE that the first strategy consisted of a capital-weighted basket of the 10 largest cryptocurrencies.
“The second strategy is more of a niche equity fund, investing approximately 80% in crypto/blockchain companies and up to 25% in cryptocurrencies,” he added.
The performance of the investments, conducted through exchange-traded products (ETPs), was closely monitored.
A period of “extreme” volatility during the test period was offset by investment performance ranging “between 100 and 300%”, Fraken said.
“At the end of the testing period, we completely divested the first strategy because, similarly to gold, we saw it as pure price speculation. Cryptocurrencies have no intrinsic value to justify their price movements,” the CIO explained.
NAEV is holding on to the second strategy for now, convinced that the positive performance track record is a solid basis for further price developments, he continued.
The volume invested in the strategy remains below 0.5% of the pension fund’s total assets, Fraken added, and crypto assets are a satellite investment rather than a significant component of the overall investment portfolio.
Watch this space
In August, the US administration opened the door through an executive order that allowed 401(k) savings and other defined contribution (DC) retirement plans to invest in digital assets.
In the UK, last year an unnamed pension fund invested 3% of its total assets, equalling to £1.5m, in bitcoin, advised by consultancy Cartwright.
Like NAEV, the scheme conducted an extensive programme of testing and due diligence before deciding to make a strategic bitcoin allocation. One year on, the allocation has grown by 56%, according to Cartwright.
The managing director of consultancy Kommalpha, Clemens Schuerhoff, told IPE that German pension funds tend to refrain from investing in cryptocurrencies or bitcoin, which are still seen as highly volatile, speculative, and without a consistent pattern of returns.
“There is also a question of risk management of such investments that take place on a decentralised blockchain that is not regulated, a question of counterparty, infrastructure and default risks,” he said.
The integration of bitcoin or native crypto assets in existing risk management models is a complex undertaking.
“There are also operational hurdles, like the integration of risk reporting and the calculation and visualisation of risks,” said Schuerhoff.
In Germany, the Fund Location Act (Fondsstandortgesetz) allows Spezialfonds to invest up to 20% of their assets in cryptocurrency.
“I would not exclude the possibility that some pension funds in Germany have small investments in packaged products of an issuer that has bitcoin exposures through ETPs and ETFs linked to bitcoin or cryptocurrency baskets, and that these types of investments are included in portfolios,” Schuerhoff said.
It would be unlikely for a pension fund to invest in bitcoin through a bitcoin blockchain wallet with private and public keys, he added.
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