To our members and other interested parties:
You may have read about our investments in blockchain technology and, quite naturally, might have questions. I am writing to you today to hopefully answer those questions and, in general, allay any fears that you might have.
Unfortunately, the blockchain or crypto space is full of misconceptions and misnomers, specifically regarding Bitcoin. Bitcoin is mentioned frequently in the media, being that it was the first blockchain database ever created. Some see Bitcoin as a form of digital gold. Our investment professionals, who have spent considerable time and energy learning about blockchain technologies, have no interest in Bitcoin as an asset. Rather we see our investments in the blockchain space as investments in technological innovation, made primarily through traditional private equity investments in companies and applications.
Since 2018, the Fairfax County Employees’ Retirement System (ERS) and the Fairfax County Police Officers Retirement System (PORS) have invested in a few crypto-related investment funds. These investments were in three major categories: namely Venture Capital, Absolute Return and High Yield Fixed Income investments.
The rationale for the Venture Capital investments was to gain exposure to the infrastructure which underlies blockchain technology itself – which is similar to other investments we have made in innovative areas. This was and continues to be viewed as a high growth area. Staff believes blockchain technology is revolutionary and will have many use cases. For example, the U.S. Department of Agriculture is already using blockchain technology to track e-Coli.
The Absolute Return fund is a hedge fund that is intended to benefit from the volatility inherent in the blockchain space. Because crypto and blockchain investments are still relatively new, it is Staff’s opinion that such actively traded momentum and arbitrage strategies will generate attractive returns.
Recently, there has been an opportunity to lend to regulated crypto institutions at attractive interest rates, with low volatility, and without taking any direct cryptocurrency price risk. These high yield fixed income investments are offering relatively good rates of return (between 7% and 12%), have low volatility, and are short-term in nature (generally 1-week to 3-months). These attractive yields are possible because of demand for capital from individuals who are working in and/or are investing in the crypto/blockchain industry, who have limited access to traditional financing. Over time, as the crypto/blockchain ecosystem continues to mature, traditional lending and financing sources are likely to be more willing to engage and participate in the space. Both ERS and PORS are using this strategy as a replacement for existing U.S. corporate high yield fixed income investments.
The current target exposure to blockchain technology, cryptocurrencies and digital assets is relatively small; 3.25% of the total ERS portfolio and 4.75% of the PORS portfolio. These investments have performed extremely well so far. Because of that, coupled with how much other asset classes have declined in 2022, the above investments now represent an estimated 6% of the ERS portfolio and 11% of the PORS portfolio through June 30, 2022. Because the Uniformed Retirement System (URS) currently has more investments in private equity and debt than ERS and PORS, it has not invested in the crypto/blockchain space.
Hopefully I have addressed your questions and concerns. If not, or if you want more information, feel free to email me at jeffrey.weiler@fairfaxcounty.gov. I always enjoy hearing from our members, whether it is to discuss our investments or to address your questions about your retirement systems in general.
Thank you,
Jeff Weiler - Executive Director
Fairfax County Retirement Systems