A small group of investors believe in crypto. Now they just have to convince everyone.
Amid inflation concerns and geopolitical tensions, institutional investors are placing their faith in private equity, private real estate assets and venture capital as the most reliable ways to earn high adjusted returns at risk over the next year. A much smaller group, however, believe that cryptocurrencies should also fall into this category.
Earlier this month, asset management firm Commonfund held its 24th annual three-day Mutual Fund Forum, held in person for the first time since 2019. Ahead of the event, attendees – including Investors representing endowments, foundations, pension funds, insurance companies, family offices, RIAs and healthcare organizations were invited to complete a survey. On Tuesday, Commonfund released its findings, based on responses from around 150 investors.
According to the survey, 70% of investors said they largely expect private equity to offer the best risk-adjusted returns over the next 12 months. Private equity was followed by private real assets (41%), venture capital (37%), public equities (29%), private credit (19%), public real assets (13%) and cryptocurrencies (10%).
“When you respond to a survey like this, you’re going to be swayed by what you’ve just seen in your year in review, and 2021 has been a great year for private equity,” said Mark Anson, director General and Managing Director of Commonfund. investment officer, says Institutional investor. “And private equity should outperform public stocks over the long term.”
While some crypto-focused investors and managers tout the emerging asset class as an inflation hedge, Anson said crypto hasn’t yet matured enough to become a reliable hedge for most investors. To do this, it must prove itself throughout an economic cycle. “It’s hard to say that crypto is positively or negatively correlated to anything, [because it] just hasn’t been around long enough to demonstrate that,” Anson said. “It’s a whole new asset class, if it’s an asset class.”
Anson said investors may be deterred from allocating to cryptocurrencies because there is no streamlined way to hold them, and he added that trustees largely have no way to ensure their portfolios crypto will not be hacked and stolen.
Additionally, he said, it is difficult to measure risk versus return in crypto. For example, Anson said that the annualized volatility of the Bloomberg Galaxy Crypto Index is 100%, which is three times more volatile than any other asset class. “Cryptocurrencies do not currently work [in] an asset allocation model,” Anson said. “[There’s] volatility so high that if you try to build a strategic asset allocation, the crypto will simply fall because of its overall risk profile. This volatility, he said, also makes it difficult to construct an expected return with cryptocurrencies, as it is much more difficult to determine risk premia.
Anson said the 10% of investors who expect crypto to offer the best risk-adjusted returns over the next 12 months are likely driven by industry discussions surrounding the asset class. “It’s news,” he said, adding that he was willing to bet that of that 10%, only a fraction actually have cryptocurrency allocations. “If you took that 10% and asked [how many of them] actually investing in crypto, [it might be] closer to 1%,” he said.
In other survey findings, 78% of respondents said they thought overall returns this year would be below average. In 2021, only 58% of respondents said the same. Fourteen percent of respondents expect returns to stay the same in 2022, while 3% expect them to be higher. Sixty-eight percent of respondents cited inflation as their main economic concern in 2022, while 66 percent cited geopolitical tensions, namely the implications of the Russian-Ukrainian war.
Current economic concerns also appear to have had an effect on survey participants’ long-term performance prospects. More than half – 56% – said they were “cautiously optimistic” about achieving their return goals over the next decade. “I was surprised it was 56%. I would have thought it would have been a bit higher,” Anson said. , it is influenced, even biased, by what happens [in the world] at present.”