Title: CalPERS, the Largest US Pension Fund, Faces Major Losses as Investment Drops to $80 Million

The California Public Employees’ Retirement System (CalPERS) has experienced significant losses in its investment related to Bitcoin, with the value of its stake in Strategy (MSTR) decreasing from over $144 million to about $80 million in a few months. While this loss is manageable given the size of CalPERS's portfolio, it highlights the volatility involved in crypto-related investments. The situation has been exacerbated by potential index exclusions from major equity benchmarks.

Key Takeaways

CalPERS’s investment in Strategy has dropped substantially from $144 million to approximately $80 million amid a sell-off.
The decline mirrors Bitcoin's volatility and a broader risk-off sentiment in the market.
Concerns over potential removal from key equity benchmarks like the MSCI index could lead to significant outflows.
Strategy's previous premium valuation has diminished, reflecting reduced investor confidence in leveraged Bitcoin investments.

CalPERS

Main Content

CalPERS, known as the California Public Employees’ Retirement System, has found itself on the losing side following a recent sell-off of its investment in Strategy. The pension fund’s initial investment in Bitcoin proxy stock dropped from over $144 million to around $80 million within a few months.

As per a recent filing with the SEC, CalPERS purchased 448,157 shares of Strategy (MSTR) in the third quarter for more than $144 million. This investment positioned the fund directly within one of the most volatile avenues for Bitcoin in conventional markets, yet its value has since plummeted to about $80 million.

In the larger picture, while this loss is substantial, it represents a manageable setback for CalPERS, which oversees over $550 billion in assets supporting more than 2 million public sector workers and retirees. Consequently, the investment in Strategy is only a small fraction of its overall portfolio.

Concerns Over Index Risk as JPMorgan Highlights Possible MSCI and Nasdaq Exits

The decline in Strategy's stock value has been particularly damaging. On Wednesday, the shares closed at roughly $175, marking a nearly 45% drop this quarter.

This decline closely follows Bitcoin’s price fluctuations amid a prevailing risk-off sentiment affecting high-beta tech and crypto stocks. Sentiment from Wall Street has also worsened; analysts at JPMorgan recently cautioned that Strategy could face removal from major equity indices, such as the MSCI USA index and the Nasdaq 100. If MSCI excludes Strategy, they estimate a potential outflow of up to $2.8 billion, and additional selling pressure could arise if other index providers decide to follow suit.

The significance of index status cannot be understated, as passive investment strategies are already heavily linked to Strategy. Funds tracking these benchmarks, which include Strategy in their indices, account for nearly $9 billion in market exposure. A decision regarding its index status is expected by January 15.

A removal from these indices would compel some funds to sell their holdings, independent of their sentiment towards Bitcoin or the company.

Loss of Premium as Investors Grow Cautious of Leveraged Bitcoin Investments

For a company like Strategy, which has built its brand on providing exposure to Bitcoin through an equity market, the risks associated with index inclusion affect more than just trading volumes. Strategy became a popular choice for institutions seeking listed access to Bitcoin without directly holding the cryptocurrency. Therefore, any loss of its benchmark status jeopardizes this important function, serving as a link between traditional finance and the crypto space.

The company's growth followed a pattern where it sold shares to the market, using the proceeds to acquire more Bitcoin, and then capitalizing on every crypto rally to justify issuing more shares for larger purchases.

During the peak of this cycle, Strategy’s market value soared far beyond the value of its Bitcoin holdings, indicating a substantial premium for its aggressive approach. However, that premium has mostly disappeared, with the company's current valuation hovering just above the worth of its Bitcoin reserves. This shift signals that investors are less inclined to pay a premium for these leveraged investments.

For CalPERS and other major funds utilizing equity proxies for Bitcoin exposure, this situation serves as a clear warning that even packaged equity investments can lead to substantial losses when market sentiment turns negative.