Note: “This analysis is an adaptation from the work of Mati Greenspan, Senior Market Analyst at eToro
- Two Large pension funds invest USD 40 million in cryptos
- While the amount is in actual terms looks good, it’s just 0.7% of the fund
- With this minimal investment, the risk to the upside far outweighs the downside risk.
Cryptos has Asymmetric Risk
As the news of the two Fairfax funds investing $40 million into cryptos hit the street, it bought a definite joy to every crypto investor. But for the fund, this investment was opportunistic and lucrative created a position where cryptos provided an attractive asymmetric return profile.
To explain, the two Fairfax funds involved in this investment have a combined $5.7 billion under management. So the $40 million they’ve put into crypto is only 0.7% of that. This is good money management at play.
Should the crypto market see another year like 2018 with an 80% drawdown, the fund will only lose 0.56% of its total portfolio. As long as the rest of the portfolio performs properly, nobody will even notice the hit. But, If crypto has a fantastic year as it did in 2017 and rises by 1000%, their overall portfolio will rise by 7%. This is what we call asymmetric risk, where the risk to the upside far outweighs the downside risk.
Traders and investors are always looking for an advantageous risk/reward ratio and now that we’ve already seen a large retracement in the crypto market, the ratio is becoming very attractive. Now that Fairfax County has opened the door, it will be interesting to see if other traditional fund managers join in.