Pension Funds' Ftx Investments: Risks And Rewards

The collapse of FTX, one of the largest cryptocurrency exchange platforms, has raised questions about the exposure of public pension funds to cryptocurrencies. FTX filed for bankruptcy protection in November 2022, causing investors to scramble to assess the fallout. While public pension plans have mostly avoided direct investments into cryptocurrencies, some U.S. public pension systems have reported financial losses related to FTX. For example, the Kansas Public Employee Retirement System (KPERS) reported a small investment in FTX, amounting to $187,400, which accounted for 0.0008% of the pension fund's total holdings as of the end of the 2022 fiscal year. Similarly, the Missouri State Employees' Retirement System lost approximately $1 million due to its indirect investment in FTX through a private equity firm. In Canada, the Ontario Teachers' Pension Plan wrote off its entire $95 million investment in FTX, and the Caisse de Depot et Placement du Quebec wrote off its $150 million investment in the failed crypto lender Celsius Network. These incidents highlight the risks associated with pension funds' investments in the volatile crypto market and the potential impact on retirees and taxpayers.

Kansas Public Employee Retirement System lost $187,400

The Kansas Public Employee Retirement System (KPERS) lost $187,400 due to its exposure to FTX, the now-bankrupt cryptocurrency exchange. KPERS is not alone in its losses, as at least 15 public pension funds managing the assets of 36 retirement systems had invested in FTX through venture capital or private equity firms. These funds include the Alaska Retirement Management Board, California Public Employees Retirement System, Delaware Public Employees Retirement System, and the Los Angeles City Employees Retirement System, among others.

The collapse of FTX has raised questions about the risks that state and local pension funds are taking by investing in unregulated cryptocurrency markets. The primary reason for these investments is the high investment return targets set by states for public pension funds, which are often near impossible to achieve through traditional investments. As a result, pension funds have reduced their investments in safe assets and increased their allocations to high-risk/high-reward investments, such as venture capital funds and hedge fund strategies.

While the exact amount of money lost by state and local pension funds on FTX is not yet known, it is believed that the losses will not significantly impact their ability to pay out benefits. However, the broader story of private capital investments from pension funds is a cause for concern. If more of these bets fail, it could lead to effective pay cuts for public workers, higher contribution rates, and even budget cuts for states, cities, and school districts.

The Kansas Public Employee Retirement System's loss of $187,400 is a small part of the larger fallout from the FTX bankruptcy, which has affected numerous pension funds and raised questions about the wisdom of investing in unregulated cryptocurrency markets.

Missouri State Employees' Retirement System lost $1 million

The Missouri State Employees' Retirement System (MOSERS) lost approximately $1 million due to its indirect investment in FTX. MOSERS is a pension fund that administers disability benefits, insurance, and retirement funds for most state employees in Missouri, including higher education staff, judges, and elected officials.

The loss occurred because MOSERS had invested in a private equity firm, BlackRock, which in turn had invested in FTX. When FTX filed for bankruptcy in November 2022, it caused a financial hit to MOSERS and other investors. The Missouri State Treasurer, Scott Fitzpatrick, confirmed that the amount lost would not affect MOSERS' ability to pay pension benefits. Candy Smith, a spokesperson for MOSERS, stated that the system's exposure to FTX at the time of the bankruptcy filing was approximately $1.2 million, representing about 0.01% of MOSERS' total portfolio exposure.

The Missouri State pension system's investment in FTX has raised concerns among state officials, with Senator Denny Hoskins commenting that fund managers may need to reevaluate their risk model. The state's investment in FTX also prompted Senator Josh Hawley to send a letter to the Department of Justice, the Securities and Exchange Commission, and the U.S. Commodities Future Trading Commission, requesting information about any correspondence between the agencies, the Biden administration, and Democratic groups regarding FTX and its sister firm, Alameda Research. Hawley alleged that FTX's founder, Sam Bankman-Fried, donated millions of dollars to Democratic candidates and that his criminal enterprise made him one of America's richest men.

The collapse of FTX has highlighted the risks associated with investments in unregulated cryptocurrency markets. In the case of MOSERS, the loss, while not significant enough to impact pension payouts, serves as a reminder of the potential consequences of investing in high-risk/high-reward opportunities to meet ambitious investment return targets.

Ontario Teachers' Pension Fund lost $95 million

The Ontario Teachers' Pension Plan (OTPP) lost $95 million after investing in the now-bankrupt cryptocurrency exchange FTX. The pension fund, one of Canada's largest, had invested a total of around $95 million in FTX in two rounds, one in 2021 and the other in 2022. The investment represented less than 0.05% of the fund's total net assets, which were over $240 billion as of June 2022.

Following the collapse of FTX, the OTPP decided to write off its entire investment in the crypto exchange. The fund's Chief Executive Officer stated that the entity would refrain from investing in digital assets in the future due to the heavy losses incurred. The OTPP board members also decided not to make any further cryptocurrency investments.

The failure of FTX has raised questions about the risks that public and state pension funds are taking by investing in unregulated cryptocurrency markets. While the losses incurred by the OTPP were a small percentage of its total assets, there was still criticism over its decision to invest in FTX. Sam Bankman-Fried, the founder of FTX, has been accused of fraudulent activities and embezzlement of customers' assets.

The OTPP is based in Toronto, Canada, and was founded in January 1990. It pays over $2 billion to around 148,000 retired employees and has over 330,000 teachers, including principals and school administrations, as part of its plan. The pension plan has invested in over 95 companies globally and made significant acquisitions, such as Westland Insurance Group, Netskope, Nextera Energy, and Arctic Wolf.

Alaska Permanent Fund Corp. indirectly invested in FTX

The Alaska Permanent Fund Corp. (APFC) is a state-owned corporation that manages the assets of the Alaska Permanent Fund and other funds designated by law. The APFC is based in Juneau and operates as a separate state entity under the oversight of an independent, professional Board of Trustees.

The APFC indirectly invested in FTX, the now-bankrupt cryptocurrency exchange, through Sequoia Capital and other venture capital firms. Sequoia's Global Growth Fund III, in which the APFC had committed up to $200 million, made an investment of up to $214 million from various investors into FTX. As a result, the APFC's exposure to FTX was not the full amount.

The Alaska Permanent Fund is one of the institutional investors that suffered losses due to FTX's bankruptcy. Sam Bankman-Fried, the CEO of FTX, resigned, and about 130 companies affiliated with FTX also began voluntary bankruptcy proceedings. FTX users could face losses of up to $8 billion, as Bankman-Fried allegedly used customer funds for risky investments in other companies, including FTX-owned Alameda Research.

The APFC's investment in FTX raises questions about the risks taken by state and local pension funds. The APFC, like other pension funds, faces the challenge of meeting ambitious investment return targets, which may have contributed to its decision to invest in high-risk/high-reward opportunities, such as FTX.

California Public Employees Retirement System invested in FTX

The California Public Employees Retirement System, or CalPERS, is one of the largest public pension plans in the United States. It serves those who serve California, including state employees, retirees, and other beneficiaries.

CalPERS has been identified as one of at least 15 public pension funds that lost money on FTX, the now-bankrupt crypto-trading platform. CalPERS did not invest directly in FTX but had indirect exposure through investments in venture capital firms such as Sequoia Capital and Tiger Global, which were major investors in FTX. CalPERS committed approximately $300 million each to these firms in search of higher yields. While the exact financial impact on CalPERS is not yet known, it is estimated that the losses will be a small percentage of their multibillion-dollar fund.

The collapse of FTX has raised questions about the risks that public pension funds are taking by investing in unregulated cryptocurrency markets and the potential impact on retirees. In the case of CalPERS, the fund had reduced its investments in relatively safe assets and increased its allocations to high-risk/high-reward investments to meet ambitious investment return targets. This is a common challenge for pension funds, as they strive to achieve high annual rates of return in a competitive market.

The fallout from the FTX bankruptcy continues to unfold, and it remains to be seen whether it will lead to significant changes in the investment strategies of public pension funds like CalPERS.

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