SEC Approves Bitcoin Futures Fund

The NYDIG Bitcoin Strategy Fund is not for high-risk averse investors.

The SEC has granted approval to a New York investment adviser to launch a closed-end Bitcoin futures fund aimed at institutional investors.

Stone Ridge Asset Management, which manages approximately $15 billion of assets, is launching the NYDIG Bitcoin Strategy Fund, which will invest in cash-settled Bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission (CFTC).

The fund will seek to purchase Bitcoin futures so that the total value of the Bitcoin underlying the futures held by the fund is as close to 100% of the net assets of the fund as possible. The prospectus also said the fund will not directly invest in Bitcoin or other digital assets.

The fund’s shares are being offered at an initial offering price of $10 per share, and are expected to be offered on a continuous basis thereafter at net asset value per share. The fund will also initially cap its net assets at $25 million. Once this cap is met, the fund will close to new investors and only the reinvestment of dividends by existing investors will be allowed. However, the fund may re-open to new investors and subsequently close again to new investors at any time.

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Besides the investments in Bitcoin futures, the fund expects to have significant holdings of cash, US government securities, and investment grade securities issued by foreign governments, supranational entities, and corporations. The cash and fixed income investments are to provide liquidity, to serve as collateral for the fund’s Bitcoin futures, and to support the fund’s use of leverage.

The prospectus cautioned that an investment in the fund “should be considered speculative and involving a high degree of risk, including the risk of a complete loss of investment.”

Dalia Blass, director of the SEC’s Division of Investment Management, referenced the registration of the fund in a keynote speech in which she discussed fund innovation earlier this month at the ICI Securities Law Developments Conference. 

“We welcome and value constructive industry engagement regarding new products and novel investment strategies,” said Blass. “A prime example of such engagement involves registered funds seeking to invest substantially in digital assets and related investments.”

Blass said that because the fund will invest in cash-settled futures it won’t face the challenges presented by direct holdings of digital assets. As it is structured as a closed-end interval fund, she said it will not offer daily redemptions and will not be subject to potentially large, unexpected liquidity demands over short periods.

Additionally, as an unlisted fund, its pricing will not depend on an efficient arbitrage mechanism and the willingness of market makers to make markets in a fund pursuing a digital asset strategy.

“The fund also has taken steps to address issues related to potential manipulation in the digital asset markets,” Blass said. “This includes prominent risk disclosures, offering the product only through registered investment advisers, and limiting the size and future growth of the fund.”

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One-Fifth of CalPERS Equity Portfolio Faces Climate Change Risk

In inaugural report mandated by state, pension details four sectors in which climate change could affect its portfolio.

The California Public Employees’ Retirement System (CalPERS) says that 20% of its $180 billion-plus equity portfolio faces financial risk due to climate change issues.

In its first climate change risk report, the pension plan identifies four equity sectors as being vulnerable to climate change: energy stocks (including utility holdings), the materials and building sector, transportation, and agriculture, food, and forestry.

CalPERS officials say that energy holdings, which make up 8% of its equity portfolio, could be subject to policy, market, and technology changes. Those changes “may result in a loss of value and/or ‘stranding’ of long-lived and carbon-intense energy assets in our portfolio.”

CalPERS also says that “energy equipment and infrastructure may be vulnerable to increased instances of drought, hurricanes, wildfires, and extreme temperatures.”

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In the materials and building sector, which makes up 6% of the equity portfolio, CalPERS says buildings with fixed locations can be vulnerable to extreme weather, including “chronic level sea rise.”

In the transportation sector, which makes up 3% of the equity portfolio, the report says, “consumer preference and policy requirements for electrification, decarbonization, and shared mobility may result in the loss of value for fossil fuel-dependent transportation.”

In agriculture, food and forestry, which makes up 3% of the equity portfolio, the report says, “policy, market, and technology developments may increase consumer demand for more sustainable food products.”

The December 9 report was mandated by the California legislature in 2018, requiring CalPERS to detail how it will deal with climate change issues. CalPERS will be required to issue a new report at least once every three years until 2035, under the new legislation.

Predictably, the pension plan does not deal with divestment of fossil fuel stocks in the report except for a small section detailing how CalPERS divested from coal company holdings between 2015 and 2017.

CalPERS investment officials have repeatedly rejected calls from environmental advocates to divest fossil fuel holdings.

The fact that CalPERS had to file the report was due to pressure environmental advocates put on California state legislators. Environmental advocates say a key shortcoming in the report is CalPERS’s lack of explanation of how its dealing with Scope 3 emissions, indirect emissions resulting from a company’s operations.

“It’s such a massive contributor to climate change,” said Janet Cox, an environmentalist and a former board member of Fossil Free California.

CalPERS in the report says it does “value the analysis of Scope 3 emissions, but data availability prohibited staff” from analyzing the information.  

CalPERS says it was limited overall in its climate change analysis.

“We are mindful in this work that much of this work is hampered by the lack of data and corporate reporting,” the report says. “Despite the importance and urgency of mitigating climate change risk, and the opportunity for value creation in the transition to a low-carbon economy there is no consistent, comparable, and verified reporting required by the US and international standard setters.”

Nevertheless, CalPERS officials are sticking to their script of engaging companies, not divestment. As noted in the report, CalPERS said it would rather have a seat at the table and be able to engage with energy companies and other corporations, helping them transform to a cleaner energy future.

CalPERS cited some of its key engagement activities with energy companies in its report over the last several years. Among them:

  • Royal Dutch Shell committed to set carbon reduction targets. “Shell also agreed to introduce a new compensation plan for its 1,500 most senior executives to ensure bonus targets included emissions reductions.”
  • “BP supported a shareholder resolution requiring company disclosure on how its business strategy is consistent with the Paris BP also agreed to include its top 14,000 executives in a compensation plan aligned to the goals of emissions reductions.”
  • “AES Corporation, an electric utilities company, performed climate scenario analysis and announced a commitment to reduce carbon intensity of its power generation by 70% by 2030.”
  • “Occidental Petroleum Corporation, HeidelbergCement, Duke Energy, Nestle, Daimler, Volkswagen, Thyssenkrupp, ArcelorMittal, BHP Billiton, and Centrica, Moeller Maersk, have made ‘net-zero’ emissions commitments for 2050.”
  • “Glencore, the world’s largest private mining exporter, has set a cap on coal production and Rio Tinto Zinc, the world’s largest mining company, has plans to exit coal completely.”

CalPERS also said that 70% of companies it has engaged through the Climate Action 100+ consortium have set long-term reduction targets. CalPERS co-founded the consortium, which includes other large global investors.

However, CalPERS noted “only 9% of the companies have targets that are in line with the goals of the Paris Agreement, showing the need for greater ambition if the Paris Agreement goals are to be met.”

The report also dealt with CalPERS record on corporate proxy voting on environmental issues. In proxy voting, CalPERS does say, generally, it “does not support environmental proposals intended to substitute for management’s operational judgments.”

CalPERS also dealt in the report with its climate change policies in its private markets portfolios. The pension plan said “$12.1 billion or approximately 18% of its combined private assets (real assets and private equity) is invested in climate solutions, renewable energy, and sustainably certified buildings.”

The climate solutions investments include renewable energy power plants and carbon agnostic transmission assets, the report said.

The second-largest US pension plan, the California State Teachers’ Retirement System (CalSTRS), is also being required to file a climate change portfolio report by Jan. 1 under the legislation approved in 2018. CalSTRS has yet to file its report

 

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