The new rule allowing Spezialfonds to invest one fifth of their funds in crypto assets has the potential to bring a radical change for institutional investors in Germany, which are starting to get familiar with the new asset class, yet still wary of it at times.
Crypto currency is a completely “new and revolutionary topic in the conservative world of German institutional asset management,” and it will take time for investors to become familiar with, Clemens Schuerhoff, managing director of consultancy Kommalpha, told IPE.
In the long term, he added, it is an area with a lot of potential, looking at the possibility of a “crypto euro, with an issuer like the ECB,” that would put a break to the “original and anarchic” nature of crypto currencies like bitcoin.
Under the Fund Location Act – Fondstandortsgesetz – German Spezialfonds can invest up to 20% of their assets in crypto assets, which could potentially unlock allocations of up to $415bn (€350bn), according to GlobalBlock.
The rules of the Fund Location Act are a “positive and strong signal” regarding “distributed ledger technology, blockchain, tokenization, digital assets and crypto currencies [and] the fact that this signal is specifically aimed at the institutional asset management [world] is remarkable and generally positive,” Schuerhoff added.
The law refers to crypto assets, meaning a digital display of value not issued or guaranteed by central banks or public bodies, and that does not have the legal status of a currency but it is accepted by natural or legal entities as a mean of payment.
The Fund Location Act seems to go hand in hand with the rule introducing electronic securities (eWpG) and the government’s blockchain strategy.
It also aims to further strengthen the appeal of Germany as financial centre internationally.
“We are convinced that digital assets, of which crypto currencies are only a part, create a new asset class that will establish itself in the portfolios of institutional investors over the long-term,” Daniel Andemeskel, head of innovation management at Universal Investment and managing director of UI Enlyte, told IPE.
Universal Investment has launched an end-to-end investment platform for digital assets last year alongside UI Enlyte.
“In the long-term, we want to create a functioning ecosystem with it,” he said.
Spezialfonds may benefit from investing in crypto assets since there is a lack of “correlation between crypto currencies and traditional assets, diversification, long and short-term price opportunities, low transaction costs, easy trading, and liquidity at all times, for most and major crypto currencies,” Schuerhoff said.
High volatility, energy consumption for bitcoin for example, and the lack of experience in the integration of crypto currencies into existing risk management models are among the downside of investing in crypto assets, he added.
Legal uncertainties or questions relating to the “physical security” of crypto currencies as assets in Spezialfonds have also raised eyebrows, he said.
According to Andemeskel, digital assets are already attracting institutional investors’ attention.
“Indirect investments were already possible from a regulatory point of view, now also direct investments are possible. We expect investors to gain initial experience and gradually increase their exposure [to digital assets],” he said.
Testing phase
The topic of crypto currencies has fallen under the radar of institutional investors and pension funds, which are by nature conservative and long-term oriented investors.
“I don’t see great interest from this group of investors, especially not through Spezialfonds mandates,” Schuerhoff said, adding that he has heard of “test investments” conducted to start having operational experience in these types of allocations.
A spokespersons at Allianz Global Investors, which runs Spezialfonds, told IPE that so far “there is practically no interest” from institutional investors, including pension funds, to invest in crypto assets.
Another asset management company for institutional investors, which asked to remain anonymous, said that crypto currencies currently do not play a role in its portfolio and it hasn’t spotted demand from customers.
The asset management company continues to monitor developments particularly relating to a rapidly changing regulatory framework that cause uncertainties, and it may reconsider its position, it said.
Institutional investors in Germany are “very far from building” a high share of allocation in crypto currencies in Spezialfonds, because of the downside mentioned above, and likely only tentative will be made in the context of Spezialfonds mandates, Schuernoff said.
“The specific investment conditions of the respective Spezialfonds must also be adjusted beforehand [and] these contractual changes will not be made unless significant allocations in crypto currencies are planned,” he added.
It will likely take a long time before seeing significant allocations in crypto currencies in Germany. “We think that more and more investors will make use of the new opportunities and invest [in digital assets] in the medium and long-term,” Andemeskel said.
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