Institutional investors, including public pension funds, have begun taking bets on fledgling funds, which invest heavily in cryptocurrency and blockchain-related companies.
But these funds also could invest directly in cryptocurrencies as well, which some industry sources argue are not a viable investment option for institutions, primarily due to volatility and valuation concerns.
In Virginia, the $4.2 billion Fairfax County Employees' Retirement System and the $1.5 billion Fairfax County Police Officers Retirement System became the first known public pension plan to commit to a dedicated fund that invests primarily in blockchain technology firms. The investments were "deliberately sized to be a small portion of each system's assets," Jeff Weiler, the executive director of Fairfax County Retirement Systems, wrote in a February note published on the system's website. The employees' fund allocated $10 million and the police fund $11 million, mandates representing less than 1% of each fund.
Both investments were made in the Morgan Creek Blockchain Opportunities Fund, managed by Morgan Creek Digital Assets, a subsidiary of Chapel Hill, N.C.-based Morgan Creek Capital Management LLC.
While 85% of the Morgan Creek fund is invested in blockchain technology firms, up to 15% of the fund can be invested directly into cryptocurrencies, Mr. Weiler wrote, adding that the fund currently "has no exposure to any cryptocurrencies."
Since June, other unidentified institutions, including a university endowment, hospital system, insurance company and private founda- tion have invested in the fund, said New York-based Anthony Pompliano, founder and partner at Morgan Creek Digital Assets.
Every investor in the fund is under the same structure, where up to 15% of the fund can be allocated to liquid cryptocurrencies, such as bitcoin, Mr. Pompliano said. The Fairfax plans made their allocations to the $40 million fund at the end of the year, he added.
"The fundraising target was $25 million, and we oversubscribed to $40 million. The fund is done fundraising and will not take any more investors," Mr. Pompliano said.
"That 15% is kind of an artificial cap because we want to make sure we are sizing the liquid investments inside of the portfolio according to the risk-return profile that liquid cryptocurrencies present," Mr. Pompliano said. Morgan Creek believes that certain cryptocurrencies, "although they are volatile, have enormous upside and, therefore, we want to make sure that we gain exposure to it. But we want to size it correctly within the portfolio."
The University of Michigan's $12 billion endowment committed $3 million in June to a dedicated fund investing in crypto-technology companies, which was created by Menlo Park, Calif.-based venture capital firm Andreessen Horowitz, according to agenda materials from the university's Feb. 21 board of regents meeting.
The fund, CNK Fund 1, also received approval for a follow-on investment of an undisclosed amount, the documents show. Follow-on investments do not require approval, only a report to the board, a university spokesman wrote in a February email, declining to provide further information.
Last year, the $29.4 billion Yale University endowment, New Haven, Conn., run by CIO David Swensen, who is known for his bold approach in alternative investing, allocated an undisclosed amount to two cryptocurrency funds, according to an October Bloomberg News report. Mr. Swensen did not respond for comment, and a spokesman for the school declined to confirm whether investments were made into cryptocurrency funds.