German Pension Fund Ventures into Cryptocurrency
The Nordrheinische Ärzteversorgung (NAEV), the pension fund for physicians in North Rhine-Westphalia, has embarked on its initial investment in the cryptocurrency market after a two-year experimental phase.
Investment Strategies Explored
In recent years, this first-pillar pension fund has been assessing the viability of cryptocurrencies through two distinct investment strategies. Originally, they allocated a maximum of 0.1% of their total assets, roughly €17 million, but this allocation has since expanded to 0.5%, or approximately €85 million, following the completion of their testing phase. Chief Investment Officer Bernd Franken revealed to IPE that the first strategy involved creating a capital-weighted portfolio of the ten largest cryptocurrencies. The second strategy takes a more specialized approach, investing about 80% in crypto and blockchain-focused companies, with an additional 25% in various cryptocurrencies. The performance of these investments, which were executed via exchange-traded products (ETPs), was meticulously tracked. Despite experiencing significant volatility during the testing period, the investment returns fluctuated between 100% and 300%, according to Franken. He noted, “At the end of the testing phase, we completely divested from the first strategy as we regarded it, much like gold, as mere price speculation. Cryptocurrencies lack intrinsic value to substantiate their price fluctuations.” For now, NAEV is maintaining its second strategy, believing that the positive performance history supports potential future price movements. Franken also mentioned that the investment in this strategy remains under 0.5% of the pension fund’s overall assets, categorizing crypto assets as a satellite investment rather than a core part of the investment strategy.
Regulatory Developments and Global Trends
This past August, the U.S. government took a significant step by issuing an executive order that permits 401(k) plans and other defined contribution retirement plans to include digital assets in their investment options. Meanwhile, in the United Kingdom, a private pension fund allocated 3% of its total assets, equating to £1.5 million, into bitcoin last year, guided by consultancy firm Cartwright. Similar to NAEV, this fund undertook a comprehensive testing and due diligence process before committing to a strategic investment in bitcoin. A year later, this allocation has appreciated by 56%, as reported by Cartwright.
Challenges in Cryptocurrency Adoption
Clemens Schuerhoff, managing director at consultancy Kommalpha, informed IPE that German pension funds generally remain cautious about investing in cryptocurrencies, including bitcoin, due to their perception as highly volatile and speculative assets lacking consistent returns. He pointed out concerns regarding risk management associated with decentralized blockchain investments, which are not regulated, and highlighted issues like counterparty risk, infrastructure stability, and the potential for defaults. Integrating bitcoin or other crypto assets into existing risk management frameworks poses significant challenges. Schuerhoff added that operational obstacles exist, such as the need for risk reporting integrations and the calculation and visualization of potential risks.
Legislative Framework for Crypto Investments
In Germany, the Fund Location Act (Fondsstandortgesetz) allows specialized funds to allocate up to 20% of their assets to cryptocurrency investments. Schuerhoff suggested that it’s possible some pension funds in Germany might hold modest investments in packaged products linked to bitcoin through ETPs and ETFs. However, he noted that it is improbable for a pension fund to directly invest in bitcoin through a blockchain wallet that requires private and public keys.
