MIAMI BEACH – Foundations are reconsidering where to invest as they prepare for weaker returns from traditional assets, and digital assets could be in their crosshairs.
At Tuesday’s iConnections conference, several investment managers said the playbook that drove profits over the past decade may not work as well in the next. Stock valuations remain high, credit spreads are near record lows and private markets are saturated, leaving little room for error.
“I think generally our expectations are that for all the traditional asset classes that we’ve invested in, we think this is both a yield compression and probably an Alpha compression,” said Kim Lew, CEO and president of Columbia Investment Management Company.
Lower expected returns create a math problem. Private foundations, for example, must disburse about 5% of their assets each year. If operating costs are added, the profitability rate increases. “If you don’t get returns of 8%, the model doesn’t work,” said Carlos Rangel of the WK Kellogg Foundation, one of the largest philanthropic foundations in the United States.
That pressure is pushing investment teams to look further afield. Columbia’s Lew said generating outperformance may require going “a little further up the risk curve” and exploring strategies they haven’t used before.
In some cases, that search has led to donations to cryptocurrency markets that were previously considered too volatile or operationally complex for traditional institutions, particularly endowments.
Early university investors, such as Yale and Harvard, backed cryptocurrency-focused venture funds years ago, gaining indirect exposure to digital assets through private vehicles. More recently, the approval of spot bitcoin and ether exchange-traded funds (ETFs) in the US has offered a simpler route. Harvard University and Brown University, for example, have disclosed positions in bitcoin and ether ETFs in their latest 13F filings.
However, even as these large funds are discussing cryptocurrency allocations amid difficult returns from traditional assets, the digital asset sector has, at least since late last year, been more difficult for investors.
Over the past year, digital assets have failed to outperform the broader stock markets and have gone through periods of strong volatility. Bitcoin fell 26% over the past year, while the S&P 500 rose nearly 17% over the same period.
However, these institutions typically invest with long time horizons and can likely tolerate short-term drawdowns in pursuit of longer-term gains. In fact, with bitcoin prices falling nearly 50% from their all-time high in October while all other asset classes rose, these funds could be cautiously looking at underperforming assets like cryptocurrencies.
A turn of feeling
While the allocations appear small compared to the overall portfolios of these giant funds, the disclosures show how digital assets have moved from the periphery of institutional finance to the mainstream toolkit.
For endowments facing lower expected returns from stocks and bonds, crypto ETFs can serve as a high-risk, high-volatility satellite position.
Still, the panelists made clear that the broader challenge extends beyond any one asset class. Many institutions are tempering expectations after years of strong market performance. Equity risk premiums appear low, private markets hold record amounts of unsold assets, and macroeconomic uncertainty remains high.
“I think it’s a really difficult setup to get outstanding returns,” Columbia Lew said.
