German funds’ crypto investments to pose liquidity risks, Fitch warns

Written by Michael Griffiths

11/08/2021

Regulatory changes allowing certain German funds to invest up to 20% of their assets in cryptocurrencies could see demand for cryptocurrencies increase, Fitch Ratings has stated.

However, Fitch warned there are significant risks, particularly around liquidity risk, for the funds investing in such assets.

The new regulations came into force on 2 August and only apply to Spezialfonds, which are reserved for institutional investors. Insurance companies and pension funds dominate the investor base for Spezialfonds and Fitch highlighted that the new changes will bring cryptocurrencies into the traditional, and more regulated, financial system. The credit rating agency suggested this could result in increased exposure to cryptoassets for retail investors whose assets, retirement benefits or insurance policies are managed by such institutions.

Open-ended Spezialfonds had assets under management (AUM) of €2trn at the end of March 2021, or around €1.8trn net of property funds, funds of funds and feeder funds. Fitch stated that this could imply maximum crypto-asset investments of up to €360bn – which compares with bitcoin’s current market capitalisation of around $860bn, or €730bn.

“We do not believe that allocations to crypto-assets will reach close to the 20% threshold, considering the traditionally risk-averse asset allocation patterns of the main institutional investors in Spezialfonds, as well as other regulatory restrictions on their asset allocation,” Fitch said.

The credit rating agency also suggested the volatile nature of crypto markets will present particular challenges to fund managers that include cryptocurrencies in Spezialfonds.

Fitch added: “The price volatility among cryptocurrencies suggests that pricing and redemption terms will be important for investors in cryptocurrency-exposed Spezialfonds. We believe that managing the liquidity risk of mutual funds invested in such highly volatile assets would be an important consideration for fund managers.

“If price volatility triggers trading breaks for exchange-traded cryptocurrency assets, this could make it more difficult for managers of cryptocurrency-exposed Spezialfonds to meet investors’ redemption requests or other obligations.”

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