With cryptocurrencies once more reaching record-highs and back in the headlines, digital assets have again become a hot topic in investor circles. Back in 2018, Callan reviewed an early boom cycle when institutional investors first expressed interest in these “bright, shiny” assets (please see my colleague Mark Wood’s paper “Handle with Extreme Care!”). Over the past eight years, the crypto industry has grown up (slightly), swinging closer to the mainstream from the fringes. The emergent technology called blockchain that Callan once noted as “promising” has now gained acceptance across a variety of use cases like payments, digital identities, logistics, health care, and many more. The cryptocurrency industry has still not reached maturity yet, however, and it continues to be afflicted by volatility, complexity, and regulatory uncertainty.

(For a primer on digital assets and the underlying technology, please see Alvaro Vega’s paper “The Critical Underlying Technology Behind Digital Assets: A Primer for Institutional Investors.”)

Digital assets in client portfolios

Looking across Callan’s institutional investor client base, which encompasses a wide variety of types, sizes, and risk tolerances, few clients have targeted exposure to cryptocurrency/blockchain assets. It is common, however, for these institutions to have small exposures to digital assets somewhere in their portfolios, often indirectly through a venture capital fund, hedge fund, and/or public equity fund. For institutional investors with an appetite for venture-like risk, an investment in digital assets can be additive from a returns and diversification perspective.

Private Equity

Within private equity, cryptocurrency and blockchain assets typically sit within venture capital, as these are high risk/return investments in an emerging industry. There are a few venture capital funds dedicated to investing in crypto, targeting blockchain businesses, tokens, or a combination of the two. Most Callan clients do not have the risk tolerance for dedicated crypto funds, as they dislike the volatility or they are not large enough for a commitment to such a niche strategy. Rather, it is more common for clients to have indirect exposure to digital assets through a generalist venture capital fund, which may invest in crypto as part of a broadly diversified strategy. The digital assets sleeves of these funds, however, are often subject to concentration caps, which are typically 10%-15% of the fund.

Most clients commit to these funds not in search of crypto exposure, but because they have conviction in the manager and the strategy more broadly. Some find the crypto exposure to be additive, while others more reluctantly tolerate it as part of investing with that manager. As long as it remains a small percentage of the portfolio, most clients are willing to accept this indirect exposure. The example below highlights one instance of how a client approached indirect exposure to digital assets within its private equity portfolio:

• Case Study – Indirect Exposure to Cryptocurrency: One of Callan’s corporate defined benefit clients maintains a large private equity program, which includes a few selective commitments to venture capital. One of its venture capital managers has a strong cryptocurrency track record and maintains dedicated cryptocurrency professionals on the investment team (the fund overall pursues a diversified venture strategy though). The client committed to the manager due to the exceptional track record and reputation, and it was willing to accept the crypto exposure, which was not subject to any cap, as part of accessing the fund. The manager ultimately made large investments in liquid tokens (including ethereum and bitcoin) as well as other tokens and equity investments in crypto/blockchain businesses. Digital assets ultimately made up a significant portion of the fund, totaling 20% of the net asset value (NAV). As part of making the commitment initially, we counseled the client to size their commitment appropriately, considering this potential risk. As a result, although cryptocurrency accounted for 20% of this fund, it only equated to 0.3% of the client’s total private equity portfolio. The cryptocurrency assets have ultimately generated strong performance, so despite the client’s initial hesitation toward these investments, they have been additive to overall returns.

Hedge Funds and Public Equities

Outside of private equity, cryptocurrency and blockchain investments can show up within hedge funds as well as public equity strategies. Among Callan’s clients, there is little interest in dedicated cryptocurrency hedge funds, which like venture capital are another asset class more conducive to investing in the space. As with venture capital, some clients also have indirect cryptocurrency exposure through their multi-strategy hedge funds, where crypto is one piece of a broadly diversified portfolio. Here too, digital assets within these funds are often subject to concentration caps.

Within public equity, crypto and token assets have garnered recent interest from institutional investors following the SEC’s approval of spot bitcoin and ether ETFs in 2024. While we have seen little interest among Callan’s clients for these strategies, a few public pension funds have invested in these ETFs, and others are currently reviewing them as options in their public equity portfolios. Driven by the new administration’s more favorable view toward cryptocurrency, multiple states have been exploring legislation to permit investments in digital assets.

While Callan clients do not necessarily have targeted exposures to digital assets in their public equity portfolios, many have smaller, indirect exposures, as is the case in private equity and hedge funds. This exposure principally comes from investments in chip production companies, mining companies, or companies that provide ancillary support to those industries. Many of the broad-based indices, like the Russell 3000, have exposure to these cryptocurrency/blockchain companies, although the exposure on a percentage basis in minimal. Even more indirectly, some public companies own bitcoin or other cryptocurrencies on their balance sheet, providing institutional investors with further indirect exposure.

Conclusion

With cryptocurrency once again dominating the headlines, institutional investors have been curious about how their peers are approaching these assets. In looking across Callan’s client base, targeted allocations to these assets is uncommon, but most clients have smaller, indirect exposures within their private equity, hedge fund, or public equity funds. Digital assets represent high risk/reward investments that may be additive to some portfolios but may be too high risk for others. While cryptocurrency has become more mainstream over the past decade, it has not yet fully matured and there are still significant risks associated with these investments. As we noted in 2018, Callan continues to patiently research and evaluate this topic as it evolves.