Millions the world over rely on pensions for their retirement. But, data gathered by Bloomberg and the American Federal Reserve has revealed that such funds, which act as economic lifelines for the soon-to-be-retired, aren’t doing too hot.
In fact, Mark Yusko, a prominent American investor, recently claimed that the pension soon may get “truly ugly” when they skirt their commitments. But there’s an unorthodox but perfectly logical answer to this growing dilemma: Bitcoin and crypto assets.
Private Pension Funds Might Be In Trouble
Anthony “Pomp” Pompliano, the co-founder of Morgan Creek Digital and business partner to Yusko, recently wrote that in Q4 2018, private pensions saw their largest loss in assets since 2008’s Great Recession, at a time when the economy was supposed to be doing better than ever.
This move, which saw private pensions lose 6% of their assets in three months’ time, put the economic futures of “tens of millions of people at a higher degree of risk than previously understood,” as Pomp explained.
In fact, Japan’s Government Pension, the world’s largest fund of its kind, lost a jaw-dropping $136 billion in Q4 2018, likely hurting the value of the war chests that millions of Japanese are entitled to receive.
Pensions have precisely wrong Asset Allocation at precisely wrong time (again…)
things will get truly ugly wrt to funding levels & ability to honor commitments when valuations mean revert…
— Mark W. Yusko #TwoPointOneQuadrillion (@MarkYusko) April 8, 2019
While these portfolios have begun to recover, as a result of the Federal Reserve’s more lenient stance on economic growth, these funds are expected to see entitlements skyrocket over the coming years, as the baby boomer demographic retire en-masse.
However, many of these funds remain drastically under their weight class, meaning that they won’t be able to distribute capital to all retirees. In fact, as Pomp explained, California Public Employees’ Retirement System, the largest public pension fund in America, with $300 billion of assets, is reportedly less than 70% funded.
But again, there’s a solution in Bitcoin and cryptocurrencies. A 1% BTC and 99% cash portfolio in and of itself beat the performance of the S&P 500 over the last decade. With this in mind, coupled with the sentiment that this trend of cryptocurrencies outperforming traditional assets will continue, Pompliano writes that is entirely logical for organizations such as Japan’s government to start considering “getting off zero.” He concludes:
“We are at an important moment in time — the retirement funds of tens of millions of Americans are in significant danger and it is important that capital allocators understand the benefits that Bitcoin and crypto present.”
Hedge Funds, Too, Should Delve Into Crypto
While there is a growing case for pensions to delve into the realm of digital assets, some are convinced that traditional hedge funds, which primarily stick to established, less volatile trades, should also gain some exposure to cryptocurrencies. In a tweet issued in early February, when many industry stakeholders were expecting for Bitcoin to establish new lows, Galaxy Digital’s Mike Novogratz made a surprisingly cheery remark.
The former Fortress Investment and Goldman Sachs executive, who has become a fervent crypto diehard, explained that he doesn’t understand why large macro funds, such as Ray Dalio’s Bridgewater Associates, don’t have any Bitcoin at all. Backing his comment, Novogratz added that such a move is logical “even if you are prone to be a skeptic,” likely touching on the asymmetric risk-return profile that cryptocurrencies are best known for.
And funds may need the potential upside that digital assets can provide. Data gathered by Hedge Fund Research and Bloomberg, compiled by the Financial Times, has indicated that hedge funds’ annual returns have waned across the board. From 1989 to 1999, as the Dotcom Bubble took hold of the macroeconomy, the average hedge fund posted 18.3% per annum.
The next decade, 6.4% a year. But over the past decade, even as stocks have begun to trade at their “most obscene valuations in U.S. history,” performance posted by Wall Street hotshots isn’t all too pretty. In fact, the average hedge fund posts a measly 3.4% gain, just inching out in front of the inflation of the U.S. dollar.
But with analysts across the board claiming that Bitcoin’s upside is monumental, even a smidgen of a position in the asset could prove to be stellar for traditional investors over the long haul, not detrimental as some expect.