By Nicole Goodkind, CNN Business

The crypto industry is still reeling from last week’s shocking death spiral of digital currency exchange FTX. The company’s bankruptcy filing has left financial backers in the lurch — including the usual suspects in Silicon Valley, from Masayoshi Son’s SoftBank to VC firm Sequoia.

A few names on the list stand out, though. The Ontario Teachers Pension Plan was invested in the company. The Alaska Permanent Fund Corp, The Washington State Investment Board and others were indirect investors in FTX through Sequoia and other venture capital firms. While these funds say they had limited exposure to FTX, their inclusion points to a growing but alarming trend that could affect you even if you’re not a buyer of crypto yourself.

(Editor’s Note: A 2022 survey conducted by the CFA Institute found that 94% of state and government pension plan sponsors said they had made investments in cryptocurrencies, along with 62% of corporate defined benefit plans and 48% of corporate defined contribution plans.)

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What’s happening

Pension funds are increasingly investing in alternative assets in search of bigger returns. Crypto is one example — and that could be risky for anyone invested in them.

In the United States, public pension funds are facing serious challenges that threaten the retirement plans of millions of state and local government employees.

The 100 largest public pension funds in the United States had been funded at just 69.3% of their total obligations at the close of the third quarter, down from 85.5% at the end of 2021 according to analysis by Milliman, an actuarial and consulting firm.

That means that these funds have a gap between the cash they’re holding and the cost of the benefits promised to both retired and soon-to-retire workers. In order to stay afloat, they have to make it up somehow. Raising taxes or re-balancing budgets pose political problems, and so many are instead attempting to juice returns by investing in riskier and more illiquid alternatives to stocks and bonds like cryptocurrency, private equity, and hedge funds.

“This really shines a bright light on what money managers are doing to try to achieve a higher rate of return. It’s not just about crypto as much as just their overall increased tolerance and appetite for these alternative asset classes,” said Matthew Eickman, national practice leader at Prime Capital Investments.

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Riskier investments, bigger rewards?

Of the roughly $4 trillion in assets managed by public pension funds in the United States, about one-quarter is allocated to risky alternative vehicles, including private equity, real estate, and hedge funds, according to the Boston College Center for Retirement Research. That’s up from 8% when they began measuring in 2001.

It’s not just a trend that’s happening in the United States. Pension assets allocated to real estate, private equity and infrastructure have increased from 7% to over 26% in the past two decades globally, according to Willis Towers Watson’s Thinking Ahead Institute.

But as the FTX debacle showed, risky investments can further erode the already damaged pension landscape. These alternative investments are often complicated, have high fees and are more volatile than stocks.

Portfolio managers are investing in “opaque investment strategies that we do not have sufficient understanding of that could create large problems in the future,” said Joe Brusuelas, chief economist at audit and tax and consulting firm RSM US. “My fear lies in these known unknowns.”

It’s been a tough year for markets, and a lot of pension funds are getting battered, which puts them in a position to look into increasing their stake in non-market investments, said Eickman.

But the recent events could prompt them to think twice. “What’s happened with FTX probably will introduce additional caution into those discussions,” he said.

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