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US Defense Contractor Lockheed Martin’s Pension Fund is Filling Up on Crypto

Last Updated August 28, 2023 8:30 AM
Teuta Franjkovic
Last Updated August 28, 2023 8:30 AM
Key Takeaways
  • Pension Funds like Lockheed Martin turn to crypto for higher profits in retirement plans
  • Retirement plans are among those endorsing the brokerage Hidden Road
  • Investors such as Citadel Securities, FTX and Coinbase contributed with $50M to Hidden Road

Pension funds, including US Defence Contractor Lockheed Martin’s one, are providing funding to Hidden Road , a crypto prime broker that is enabling hedge funds to increase their exposure to volatile cryptocurrency assets.

This signifies a divergence from the usual practice, as banks traditionally provide such funding within conventional markets.

CCN reached out to Lockheed Martin and Hidden Road for commentary but did not receive a reply at the time of publishing

Hidden Road’s $50M Boost Revives Crypto Market

London-based Hidden Road has established itself as a key participant in bridging traditional investors and digital assets after raising $50 million in stock last year from companies including Ken Griffin’s Citadel Securities and Coinbase, among others.

The organization also acts as a potential lifeline for the cryptocurrency market, which is suffering from severe leverage constraints and a decline in trading activity as a result of a slew of scandals, including the collapse of exchange FTX.

For traders looking to boost their wagers in established markets like equities, prime brokerage is a popular technique to obtain leverage.

The huge balance sheets of Wall Street banks are used by traditional prime brokers to provide credit to hedge funds, family offices, and high-speed traders.

The primary broker or its investors may be on the hook for significant losses on investments made by a hedge fund that borrowed money from it.

Andrew Urquhart, professor of finance and financial technology at Henley Business School, described  it as a highly precarious investment saying if his pension fund announced intentions to venture into crypto, he’d harbor significant concerns.

Freshfields partner Cyrus Pocha emphasized  that the conventional model doesn’t involve sourcing funds from external investors, adding that they lack a vested interest in the reimbursement process when a prime broker adopts such an approach.

Following FTX collapse and a number of US enforcement actions against Coinbase and Binance, crypto markets have endured a trying year. According to CCdata , spot cryptocurrency trade volumes have more than halved to $515 billion in July from $1.2 trillion in the same month last year.

Lockheed Martin Leads the Way

US Defence contractor Lockheed Martin’s plan and other pension funds decision represents the most recent foray into cryptocurrency by pension funds.

However, some have burned, underscoring the dangers of markets for digital assets. Investments in the FTX and Celsius were lost by Canada’s $190 billion Ontario Teachers’ Pension Plan and $300 billion CDPQ.

According to a person familiar with Hidden Road’s thinking, the company views itself less like a bank prime broker and more like a private equity or investment firm that raises outside cash to fund activities.

The company was established in 2018 by Marc Asch, a former Steven Cohen’s hedge funds SAC Capital and Point72 employee. It is named after the Massachusetts street where Asch grew up. Before branching out into digital assets, Hidden Road was a major brokerage for foreign exchange.

Flow Traders and Virtu Financial, two significant market makers, currently use Hidden Road, which has regulatory licenses in the UK, Netherlands, and Singapore but US investors are not permitted to use its crypto services.

A corporation acting as an exchange, broker, and trader all at the same time could lead to conflicts of interest but Hidden Road does not engage in any trading itself, allaying these concerns. Prime brokerage is offered by companies like Coinbase and Gemini, which raises these issues.

Even for the largest banks, prime brokerage is a naturally risky venture. After family office Archegos failed, Credit Suisse recorded a $5.5 billion loss , which ultimately led to the bank’s issues as it was acquired by UBS.

“If you’re providing full financing, you have to be able to assess the credit risk,” legal company Harry Jho LLC founder Harry Jho said , as he specializes in prime brokerage. “It’s a very tough business.”

Charging an Exchange Risk Spread

An investor who met Hidden Road claimed  it was “prime broking on steroids” and warned against using other people’s money because there are hazards involved.

A concern raised among several executives is the scale of Hidden Road. According to sources with knowledge of the situation, it has a balance sheet in the hundreds of millions rather than the billions of dollars that banks generally have.

Although Hidden Road would be responsible for any losses, some worry that its balance sheet would not withstand a significant market catastrophe and that the capital providers may need to come up with additional funds on short notice.

To guard against a possible venue failure, Hidden Road charges an “exchange risk spread.” When FTX collapsed, customers who had paid for this and used Hidden Road to trade on SBF’s exchange were reimbursed, according to those with knowledge of the situation.

Customers claimed that it has a rigorous due diligence. A market maker leader said: “They put us through the wringer.

But prime broking may be a shaky service, as the cryptocurrency sector has discovered the hard way. Tradeblock, a primary broker owned by Digital Currency Group, closed its doors last year, and Genesis’ lending division filed for bankruptcy .

The entire institutional broking and [crypto] prime brokerage area is virtually empty, according  to Gautam Chhugani, senior analyst of global digital assets at Bernstein.

The volatility of Bitcoin and other tokens, he claimed , makes them a particularly challenging asset to manage. Others “have tried the prime broking models in various ways, some of which blew up.”

Lockheed Martin Embraced Blockchain Technology in 2017

The fact that Lockheed Martin is so open to cryptocurrencies shouldn’t actually be surprising at all as in 2017, the company announced  it has adopted the blockchain technology that underpins cryptocurrencies, making it the first US defense contractor to do so.

In order to employ Guardtime Federal’s blockchain-based cybersecurity apps, Lockheed Martin said the two companies have partnered. These applications will be incorporated into the company’s systems engineering procedures, supply chain risk management, and software development initiatives.

“These new cyber security approaches will enhance data integrity, speed problem discovery and mitigation, and reduce the volume of regression testing, which results in reduced schedule risk. The faster our developers can discover issues, the faster we can deliver, “ the company then said .

Guardtime Federal may not have been surprised to learn that Lockheed Martin was one of its clients since it already collaborates with the Department of Defense and other American law enforcement organizations. For the US National Security market, the business is already developing secure detection and communications systems.

More businesses working on sensitive research, development, and application areas are moving toward embracing blockchain as a way to meet their needs for cybersecurity, transparency, and management as the advantages of distributed ledger technology become more well-understood.

 

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