How the crypto crash could affect it

New York
CNN business

The crypto-industry is still reeling from last week’s shocking death spiral of digital currency exchange FTX. The company’s bankruptcy filing has rattled financial backers — including the usual Silicon Valley suspects, from Masayoshi Son’s SoftBank to VC firm Sequoia.

Some names on the list stand out, however. The Ontario Teachers’ Pension Plan was invested in the company. Alaska Permanent Fund Corp, Washington State Investment Board and others were indirect investors in FTX through Sequoia and other venture capital firms. While these funds claim to have had limited exposure to FTX, their inclusion points to a growing but worrying trend, even if you’re not a crypto buyer yourself.

What’s happening: Pension funds are increasingly investing in alternative assets in search of higher returns. Crypto is one example, which can be dangerous for anyone who invests in them.

In the United States, public pension funds face serious challenges that threaten the retirement plans of millions of state and local government workers.

The 100 largest public pension funds in the United States were funded at 69.3% of their total obligations at the end of the third quarter, down from 85.5% at the end of 2021, according to an analysis by Milliman, an actuarial and consulting firm.

This means that these funds have a gap between the cash they hold and the cost of benefits promised to retired and soon-to-be-retired employees. In order to stay the course, they have to make it up somehow. Raising taxes or rebalancing budgets creates political problems, and instead many are trying to profit by investing in riskier, more liquid alternatives to stocks and bonds, such as cryptocurrency, private equity and hedge funds.

“This really shines clear what money managers are doing to try to achieve a higher rate of return. It’s not just about crypto that increases their tolerance and appetite for these alternative asset classes,” said Matthew Eickman, national practice leader at Prime Capital Investments.

Riskier investments, higher rewards? Of the roughly $4 trillion in assets managed by public pension funds in the United States, a quarter goes into risky alternative vehicles, including private equity, real estate and hedge funds, according to the Boston College Center for Retirement Research. It is higher than 8% when they started measuring it in 2001.

It’s not just a trend happening in the United States. Pension assets allocated to real estate, private equity and infrastructure have risen from 7% to 26% globally, according to Willis Towers Watson’s Thinking Ahead Institute.

But as the FTX disaster showed, risky investments can further erode an already damaged pension landscape. These alternative investments are often complicated high fees and are more volatile than stocks.

Portfolio managers are investing in “opaque investment strategies that could cause big problems in the future,” said Joe Brusuelas, chief economist at US audit and tax and consulting firm RSM. “My fear lies in these familiar unknowns.”

The silver lining: It’s been a tough year for the markets, and there are a lot of pension funds getting hit, which puts them in a position to consider increasing their holdings in non-market investments, Eickman said.

But recent events may make them think twice. “What happened with FTX will probably inject some extra caution into those discussions,” he said.

U.S. markets snapped a two-day rally and closed lower on Monday after Fed Governor Christopher Waller warned that the end of the central bank’s rate hikes is “still out of the question.”

“Maybe we’re at a point where we can start thinking about going at a slower pace,” Waller said at a conference hosted by UBS in Australia. But he warned investors that the Fed was not softening its fight against inflation. “Stop paying attention to the pace and start paying attention to where the end will be. Until we reduce inflation, that last point is still a way to go.”

The comments came after a report released last week showed inflation was lower than expected in October. Investors took the data as a sign that the Fed could soon move away from historically high rate hikes, and markets had their best day since spring 2020.

The CPI inflation report was “good news,” Waller said, but it’s “just one data point” and more readings are needed to convince policymakers that inflation rates are easing.

Mixed message: Stocks rebounded from session lows on Monday after another Fed official delivered another message. Federal Reserve Vice Chairman Lael Brainard indicated on Monday that the central bank may soon slow the pace of interest rate hikes.

“I think it’s probably appropriate to move to a slower pace of rate hikes soon,” he told Bloomberg News in a live interview. “We raised rates very quickly,” he said. “We’ve been reducing the balance sheet, and you can see that in financial terms in inflation expectations, which are pretty well anchored,” he said.

Bottom line: Markets may remain volatile until rate hikes end. Investors will look for clues on future Fed policy in Tuesday’s Producer Price Index report, Wednesday’s retail sales report and Thursday’s Philly Fed manufacturing index. But it’s better not to fight the Fed: When officials say that no data will change the policymaking process, they mean it.

President Joe Biden held a three-hour conversation with his Chinese counterpart Xi Jinping on Monday, Biden’s first face-to-face meeting since taking office, colleagues Kevin Lipta and MJ Lee reported. The meeting comes at a time when relations between China and the US are deteriorating.

Afterwards, Biden told reporters that he was “open and honest” with Xi about issues on which Beijing and Washington disagree. “I’m not suggesting this is kumbaya,” Biden said at a press conference, “but I don’t think there’s any need to worry because one of you raised a legitimate question. [about] A new Cold War.”

Economic relations: Xi reportedly criticized the US during the meeting for trying to build “walls and fences” and encouraging “decoupling and cutting supply chains”. “We are against the politicization and weaponization of economic and trade ties as well as science and technology exchanges,” he said.

A White House readout said: “(Biden) reiterated that (US-China) competition should not lead to conflict and stressed that the United States and China must manage competition responsibly and maintain open lines of communication,” the statement said, adding has The leaders have asked their teams to carry out this work.

Promote markets: Stocks in mainland China and Hong Kong were higher on Tuesday, colleague Laura He reported. Analysts said the meeting’s unexpectedly constructive tone boosted sentiment. The meeting sent a positive message that both sides would strive to find common ground, they added.

What’s next: The US will send Secretary of State Antony Blinken to visit China to continue their discussions, the White House said.