Sovereign Funds (III)

In the last two weeks we’ve seen why sovereign funds are so important and we’ve demonstrated that they are not yet into crypto although some of them are starting to take positions on the market. Today we will see how they work and what their investment strategies are.

How the SIF works: Investment strategies.

Profits are not always the main objective. Economic transformation or sustainability for example are important goals for them. They use two strategies, being part of the shareholders (and voting) or divesting (in non-sustainable companies, for example).

We’ve seen them coming into the rescue of banks during the financial crisis, cruise companies during the tourism crisis during the lockdown, … or in pandemic, fostering research in biotech for the vacuum.

In 2020 the Care Act in the US enacted a $2T stimulus package, with a huge impact into the liquidity and causing this historical high inflation that we are now experiencing.

Another good example is the Qatar Investment Authority (QIA). In 2019 acquired the St. Regis Hotel on NY fifth avenue, a prime property in a global city as a store of wealth for the citizens of Qatar, outside the instability of their own region. A store of value. One of the main characteristics of BTC.

Another example: Norway’s Oil Fund was called to invest 4.8% of their assets to reduce the impact of the pandemic. 

These kinds of funds don’t like to be exposed to the media, but we can see some clear tendencies. They are attracting more talent, adding more diversified assets, expanding to more active investments and more globally. 

A good example is the Canadian Pension Fund (CPPIB). In 1990 100% was invested in Canada, today it’s only 15%. They invest in Indian start-ups, in early stage techs in Silicon Valley or Fintech in London

In these Sovereign funds, politics matters. The South Korea $600M pension fund, which reports directly to the parliament it’s been banned from investing in “war crime companies” (Japanese companies implicated in war crimes during the Japanese occupation of Korea) and now they have to review the $1B portfolio of Japanese companies. Crypto projects should take this into consideration. That’s why it’s so important to accomplish the sustainable goals for mining, scalability and security for any crypto.

Security.

Some say that the immaturity of the crypto market, the technological problems of new developments, or the lack of security is one of the barriers for SIF. Hacks are a common issue exploited by the media to attack crypto. But hacks and fraud are as common as any other industry. The main difference here is that the Blockchain technology provides traceability. We have a vast sum of examples. Last example was the Ronin hack, where hackers can’t dispose of the stolen tokens if they don’t want to be identified.  

In the SIF the biggest fraud was made by Jho Low from the Malaysian Fund that instead of investing in development projects invested in Hollywood films (like The Wolf of Wall Street) and caused a fraud of $4.5 billion! He bought a yacht ($125M), jets ($35M), houses ($51M) for his personal joy. The prime minister has been sentenced to prison and Goldman Sachs had to pay $3.9 billion in the settlement with the Malaysian government.

So no lessons for crypto here 😉

Major Trends

As SIF create global long term portfolios, global trends are the main strategy to choose where to invest. 

Sustainability (one planet) is one of the main trends, as it is AI (artificial Intelligence). In Germany, for example, APG (pension manager for several pension funds) is using Artificial Intelligence to select companies that contribute sufficiently to the UN Sustainable Development Goals.

In Belobaba Crypto Fund we have a division of AI named Subutai that has created two winning trading strategies with a success ratio of near 80%. In the last 5 months, this strategy has won the market (ETH or BTC) by more than 40 points in a rough market where BTC has lost 25% and ETH 20% during the same period.

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But the major trend, without doubt, is the Digital Revolution

Silicon Valley or Tel Aviv (Startup nation) are good examples. In 2014 the Pentagon, CIA and US Defense Ministry started investing in cybersecurity, and Israel is well known for its technological parks specialized with hundreds of cybersecurity companies. Another one is space exploration, once only suitable for government agencies, now driven by SpaceX (Elon Musk), Blue Origin (Jeff Bezos) and Virgin Galactic (Richard Branson).

Here in Europe, the concept “technological sovereignty” has appeared after realizing the high dependence from outside companies in key tech sectors (Apple, Samsung, Google, Amazon, Microsoft and all the European tech companies invested by foreign sovereign funds). That’s why the EU wants to launch a €100B fund to “find European solutions to the digital era” , said Ursula von der Leyen.

We can find hundreds of examples of geopolitical government decisions that drive investment strategies from SIF. The US efforts to enter into 5G, banning Chinese investment, … That’s why it’s so important to understand the difficulties for SIF to enter into crypto, only when government interest and strategies are aligned with crypto we will see real movements in this field. And the SIF that are lower connected to Central Banks and traditional monetary agents and lobbies will be the first to enter.

As soon as those SIF understand that crypto is the biggest startup market in the history, the place where the next big tech companies of the next decades will rise, they will jump into the hunt of the next unicorns, not only as a store of value, but as a national treasure to protect and safe. 

BTC is an alternative to dollar, gold, euro or yuan. No country can despise the threat and the opportunity it represents. Just take a look at what the six most powerful sovereign funds that manage hydrocarbon exploitations (Norway, New Zealand, Kuwait, Saudi, Qatar and UAE) did to face the climate change challenge. They created the “One Planet” working group to face the threat and treat it as an opportunity. When the change is inevitable, you better lead it.

SIF wants to decide

AS SIF developed more complex strategies and invested in more different sectors they tend also to be more involved in the decision making process of the management. 

The SIF fund NPS of Korea is a good example: They hold about 7% of all the market cap of all public Korean stocks. Historically known as the “yes man” fund, from 2016 to 2019 they doubled the number of “against” votes in corporate decisions of invested companies. 

They want to be active, but crypto is too complex for them right now. That’s why it will be very important for them to have external confident support with this, and Belobaba could play an interesting role here, because we have the expertise and professionals that understand the complexity of both, the technological and financial world. 

More aggressive

The number of listed companies is shrinking. Since 1996 the number of companies is descending, and companies (like Spotify or Slack) prefer direct listing. IPOs are less common. That’s why SIF had to move to invest in not listed companies although it’s less transparent to find the next unicorns.

Sooner or later they will have to move to the crypto sector to find the next unicorns and they will need a lot of help to understand the new rules that apply in this new paradigm.

The advantage here is that these new investment strategies have let them operate in more flexible and cooperative ways, co-investing with other partners and using other instruments.

Next week we will see some conclusions and how Belobaba can take advantage of this. 

Yours in crypto

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