In 2010 Steve Schwarzman, who runs the private equity and hedge fund behemoth the Blackstone Group, compared efforts to raise taxes on private equity and hedge fund managers with Hitler’s invasion of Poland. Schwarzman ended up apologizing for the inappropriate analogy, but on the morning after the House of Representatives voted for a Senate-passed deal to avert the fiscal cliff, it increasingly looks like hedge fund and private equity managers have won their war in Washington.

The bottom line is that hedge fund and private equity moguls will continue to be taxed relatively lightly after the new fiscal cliff legislation. Carried interest will continue to be taxed as long-term capital gains for hedge fund and private equity managers. The top rate for capital gains has increased to 20% from 15%, but most of the carried-interest benefit has been retained. That means that the rich performance fees hedge fund and private equity managers charge their investors—usually 20% of their investment profits—will continue to get favorable tax treatment.

The survival of the carried-interest tax break created by high-paid lawyers for some of the richest Americans is ironic given that President Barack Obama’s announced goal in the fiscal cliff negotiations was to tax the richest Americans more. Now, there will be some rich lawyers and dentists who are paying higher taxes while the far richer hedge fund and private equity moguls the lawyers and dentists work for will experience less of a tax hit. Nobody will cry for the hip surgeon who is being taxed more, but there are no hip surgeons on the Forbes 400 list of richest Americans. There are, however, 31 hedge fund managers on the Forbes 400, representing 8% of the nation’s wealthiest individuals. There are another dozen or so private equity guys on the list, too.

The hedge fund and private equity victory in Washington is pretty impressive given that these rich industries overwhelmingly supported Mitt Romney, a former private equity mogul himself, in the presidential election. In addition, some prominent rich people, like Warren Buffett and David Tepper, himself one of the most successful hedge fund managers in the nation, have called for getting rid of carried interest.

But hedge fund and private equity rich guys have successfully deflected away repeated attempts to change the way they are taxed on performance fees. They have argued that carried interest is appropriate because the capital has been at risk in their funds; that the political fight over carried interest is not worth it because eliminating it would not pick up much revenue in the big fiscal picture; and that targeting hedge funds and private equity funds and not other industries that apply carried interest, like the politically powerful real estate business, would be unfair. President Obama might still give it another try in his second term, but for now there seems to be little enthusiasm for doing anything about carried interest in Washington.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for  York Liberty Zone,” which was a program to provide post-9/11 recovery funds. Rather than going to small businesses affected, however, this was, according to Bloomberg, “little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp.” Michael Bloomberg himself actually thought the program was excessive, so that’s saying something. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.

Canadian oil has become the world’s cheapest crude due to a combination of surging production, lower demand due to refinery maintenance and a chronic shortage of pipeline capacity that has created a glut in the oil-rich province of Alberta.

This week the cost of Western Canada Select, the regional benchmark for low quality, viscous heavy oil, has fallen to less than $45 a barrel – less than half the cost of other crude oil benchmarks.

Oil companies in Canada pumping heavy crude, such as Toronto-listed Imperial Oil and Suncor Energy, are selling their production for a bargain; less than half the near $110-a-barrel cost of Brent, the global benchmark, in the London-based ICE Futures market.

The country’s trade balance and currency are suffering as a result. Charles St-Arnaud, economist at Nomura, says Canadian oil producers are earning C$2.5bn less than they should every month.

“This implies a revenue loss of about C$30bn a year, or about 1.6 per cent” of gross domestic product for Canada, he says.

The situation is likely to get worse in the first half of 2013 before it improves.

On Thursday, the price differential between WCS and West Texas Intermediate, the US benchmark, widened to $41 a barrel, the most since December 2007, according to Reuters data. WTI is already trading at a discount of $22.50 a barrel against Brent, creating a massive gap of $62.50 a barrel. Even counting the barrels of Iranian oil moving in the black market due to sanctions, no other crude is cheaper, traders said.

Brent crude on Friday traded at $109.04 a barrel, up 1.9 per cent on the week.

The plunge in the value of WSC relative to other benchmarks comes after Canadian oil production surged above 4m barrels per day for the first time in August, the latest data available, on the back of the oil sands boom, according to data from the US Department of Energy.

Oil sands are a concentration of a mix of sand, clay, water and viscous crude oil that producers extract, in some cases using conventional mining techniques. The crude is later separated from the sand.

Since 2000 until the middle of this year, oil producers in Alberta, the province where most of the oil sands mines are located, have added 1.4m b/d of new production to the market – equal to the total production of a midsized member of the Opec oil cartel, such as Libya. The boom is continuing, with Imperial Oil planning to add another 110,000 b/d in early 2013 with the opening of its Kearl crude oil sands mine.

With more crude from the oil sands flowing and pipeline capacity unchanged, Canada is likely to remain the bargain basement of the global energy industry.

Within the last two weeks, the oil market delivered some bad news for oil and gas companies operating in Western Canada. The bad news can be summarized by the headline of an article on the commodity page of the Financial Times: "Canada's oil becomes cheapest in world amid glut in Alberta."

The forces that have created this situation include surging oil production, lower demand due to refinery maintenance and a chronic shortage of pipeline capacity to move growing volumes beyond the regional Canadian market. The impact of these conditions caused the price for Western Canada Select, the regional benchmark for low quality, viscous heavy oil, to fall below $45 a barrel, less than half the cost of other crude oil benchmarks. This price disparity is estimated to be costing the Canadian oil and gas industry about C$2.5 billion per month, or an annualized income loss of C$30 billion, or about 1.6% of Canada's gross domestic product.

With the price of Canada's heavy oil this low, it is selling for less than half the $111 a barrel price (December 26, 2012) consumers are paying for Brent oil, the global oil benchmark. Furthermore, Canada's oil is now selling at about $41 a barrel below the United States' benchmark West Texas Intermediate crude oil, which in turn is trading nearly $23 a barrel below Brent.

The gap between WTI and Canada's oil price is the most since December 2007. Prospects are that the situation is likely to get worse in the first half of 2013 before it improves. These low levels for the benchmark crude oils of North America reflect surging production in the United States that has been unleashed by the oil shale revolution and the rise in Canada's oil sands output. Based on the latest data available from the Energy Information Administration (EIA), Canada's oil production has climbed above four million barrels a day (mmb/d) while U.S. production is the highest it has been since 1998. Until oil consumption ramps up, or Canada finds another export market or the U.S. government liberalizes its oil export restrictions, the glut in North American heavy oil will continue to grow.

Since 2000, with the growth in oil sands output, Alberta's total oil production has increased by about 1.4 mmb/d. Plans call for an additional 100,000 barrels per day of oil sands output coming on line early next year from Imperial Oil Company's (IMO-NYSE) new Kearl mine. Canada's production growth is about equal to the output of Libya, a mid-sized OPEC producer, showing the significance of the country's new output in the global oil market.

Until this production glut is resolved, Canada' crude oil will continue to sell at a steep discount to other benchmark crude oils, costing Canadian producers significant cash flow. That means there is a growing likelihood that as this wide price gap continues producers will be forced to reduce their expenditures compared to what they would spend otherwise. That could be bad news for the Canadian oil and oilfield service industry in the second half of 2013 if the pricing gap doesn't shrink.

Federal and provincial governments are reeling from the impact of the lack of pipelines and new markets for Alberta crude - an alarming dilemma that could cost Canada more than a trillion dollars in lost economic activity.

With no quick fixes in sight, both the federal Conservatives and the Alberta Tories led by Alison Redford are now readjusting revenue projections and deferring plans to balance their respective budgets.

Alberta's oilsands bitumen is selling at a $36-a-barrel discount because of a glut of oil in the United States and a lack of pipelines to get the Canadian product to the eastern and western coasts and down to the Gulf of Mexico.

The Canadian Energy Research Institute (CERI) has estimated that if three major pipeline expansion projects don't get built, the country will forgo as much as $1.3 trillion of gross domestic product and $276 billion in taxes over the next two decades.

Federal Natural Resources Minister Joe Oliver calls it "a serious issue" with no short-term solution.

"If we do not take heed of warnings and diversify our markets for energy by building infrastructure like pipelines, then our resources will be stranded and we will lose jobs and businesses in Canada," Oliver told the Saint John Board of Trade last month.

"We're losing $50 million every single day - $18 to $19 billion every year - because our resources are landlocked."

In a later interview with the Herald just before Christmas, Oliver said the numbers are likely even higher as the differential has increased since he gave the speech. CERI says the lost revenue could now be more in the range of $75 million a day.

Oliver said the situation "is screaming out for us to diversify, and we need pipelines to do that.

"This whole area is incredibly important to the economy of the country and it is so dynamic and changing - not only in Canada, but globally - that I expect it will be top of mind as an issue through (2013), and it will be a major focus, of course, for me," he said.

The federal government has pushed back its plan to eliminate the deficit by two years as a result of a recent projections of a $6-billion revenue shortfall.

"It doesn't take a rocket scientist to figure out that the reason they have deferred balancing their budget out two years from where they first talked about it is in large part due to commodity prices," Alberta Finance Minister Doug Horner said in an interview. "That differential is starting to hurt the national economy - not just Alberta."

Horner said the discount - the differential between the price for benchmark West Texas Intermediate (WTI) oil and Western Canada Select, which represents a blend of conventional heavy crudes and bitumen - is far more serious than he initially believed when the province released its second-quarter fiscal update in late November.

In a hastily called scrum outside his office a week before Christmas, a grim-faced Horner warned that cuts are coming in next year's budget to address a projected shortfall in revenue, which he didn't specify, but which sources have warned could hit $6 billion to $8 billion.

"I'm very, very concerned where those numbers are headed," he told reporters.

In recent months, the differential appears to be widening, rather than narrowing, and that spells even bigger trouble for Alberta in the future because provincial production is expected to ramp up to 4.5 million barrels per day- up from 2.2 million - and most of that increase is from the oilsands.

In mid-December, bitumen was selling for $47 a barrel - $40 below the WTI price and nearly $60 below the global Brent price. The differential has hovered around $32 to $36 a barrel in recent days.

CERI senior research director Dinara Millington said the large differential means Alberta is getting lower royalties and the federal and provincial governments are getting less in corporate taxes.

"Producers are losing money and hence they are paying less taxes and less royalties and overall GDP for the province and the country is lower," she said.

The situation is compounded by higher operating costs, which petroleum producers can deduct before they pay taxes and royalties, she added. "It's like a double whammy."

Horner said in an interview the province may not be able to meet all of the commitments to stable funding for services and programs it made in the last budget and he warned the public sector will have to temper its wage demands.

"There are certainly some dark clouds ... that are going to be impeding Alberta's economic situation for the next little while," he said. "We're going to do everything ... to control costs, and to hit our targets, and that's going to be meaning some tough choices for the ministers."

Last spring, Alberta's Progressive Conservatives won a hard-fought election on the promise of a balanced budget by 2013, but that hope seems to be hanging by a thread eight months later.

The premier said Albertans are used to volatility in the oil-patch, but this is different.

"This is no longer just the price of oil being high or low," Redford said in an interview.

"This is about how our access to markets is impacting our product in particular. So the work we've been doing on a Canadian energy strategy, the work we've been doing in Asia, the work we've been doing to talk about why producing our resources is in the national interest, is what we're seeing now playing out across the country," she said.

One point on which the federal and provincial ministers agree is there is no silver bullet to resolve the dilemma.

Analysts have suggested that even if pipeline expansion now underway adds a million barrels a day of capacity, it won't eliminate the price discount.

Public opposition to a proposed Northern Gateway pipeline running from northern Alberta to Kitimat, B.C., has some analysts giving the line only a 50-50 chance of proceeding. But Horner said the work Redford has been doing in meetings with other premiers, United States energy executives and Chinese officials has laid the groundwork for the new markets Alberta needs for the future.

"Obviously, we're trying to work collaboratively with other jurisdictions to ensure there are no impediments that are put in the way of us achieving that market access," Horner said.

"We've also had some discussions with New Brunswick about moving product right out to the East Coast for export, which looks very promising."

The finance minister said market access for provincial crude is "a very, very big and critical issue for Alberta."

It's also a big issue for the federal government, which takes the lion's share of tax revenue from the oilsands.

CERI estimate the oilsands will generate $44 billion in tax revenue across Canada over the next 25 years - and more than 70 per cent, or $332 billion, will go to the federal government.

Federal Minister of State (Finance) Ted Menzies said Ottawa will not be happy to see how much money it is losing, but the government won't be investing in any pipeline companies.

"The federal government isn't in the business of building pipelines," Menzies said. "It's the private sector that needs to be involved in that."

But he said it's no secret that, in the interim, pipeline companies are looking at reversing existing lines to move bitumen east.

"If we can actually move our bitumen to refineries in Central Canada or Eastern Canada, we lower that differential and it is good for all of Canada."

Horner said until the pipelines get built, Alberta producers could move their product by rail.

"We need to take a very serious look at every opportunity we have to expand our market access, because it is the critical component to a landlocked province that is an energy producer in a jurisdiction with rising production," he said.

Defined benefit (DB) pension plans’ solvency in Canada improved slightly in 2012 thanks to company contributions and a strong equity market, according to Aon Hewitt, the global human resource solutions business of Aon plc (NYSE:AON). The median pension solvency funded ratio – or the ratio of the market value of plan assets to liabilities — is approximately 1 percent higher this year than at the start of 2012.

According to Aon Hewitt, opposing factors had an overall positive impact on the financial status of defined benefit pension plans this year. On the one hand, interest rates continued their decline pushing up the value of liabilities of pension plans. The discount rate used to calculate the liabilities to be settled by annuity purchases in case of a plan termination went down from 3.31percent at the beginning of the year to 2.96 percent at the end of 2012.

On the other hand, equities performed well, with Emerging Markets leading the pack at 16.0 percent, followed by International Equities (15.3 percent), US Equities (13.4 percent) and Canadian Equities (7.2 percent). Pension plans invested in alternative asset classes such as Global Real Estate and Infrastructure were rewarded with returns of 25.8 percent and 11.7 percent respectively. Finally, most plan sponsors had to contribute towards their deficits due to minimum solvency funding requirements.

The combination of all these factors led to a slight rise in Aon Hewitt’s median solvency funded ratio of a large sample of pension plans from 68 percent at the end of 2011 to 69 percent at the end of 2012. About 97 percent of pension plans in that sample had a solvency deficiency as at December 31, 2012. The solvency funded ratio measures the financial health of a defined benefit pension plan by comparing the amount of assets to total pension liabilities in the event of a plan termination.

“There are mainly three ways that plan sponsors will see themselves out of this solvency conundrum,” said Thomas Ault, an associate partner in Aon Hewitt’s Retirement Consulting practice. "Through an increase in interest rates, favorable equity and alternative markets returns, or through higher employer contributions. We had two out of three this year.”

The following graph depicts the movement of assets, liabilities and funded ratios for this median pension plan since January 1, 2010 (click on image above).

The graph shows that assets have only increased by 20 percent over the three-year period since January 1, 2010 while liabilities, driven by a continuous drop in long term interest rates, have increased by 50 percent over the same period.

Impact of de-risking

In addition to the performance of the typical plan, Aon Hewitt has also tracked the performance of a plan that has employed a few simple de-risking strategies since January 1, 2011, such as:

· Increased investment in bonds from 40 percent to 60 percent of the portfolio

· Investment in long bonds instead of universe bonds to better match liabilities.

The de-risked plan experienced a 79 percent solvency ratio as at December 31, 2012 as opposed to 69 percent for the median plan.

Looking Ahead to 2013

According to Aon Hewitt, there was, again, downward pressure on yields in 2012, and it is likely to continue in 2013. “The demand on long bonds by pension funds and insurance companies to better hedge their liabilities, foreign investors looking for a safe haven and the level of public debt are all contributing factors to this trend,” said André Choquet, a senior consultant in Aon Hewitt’s Investment Consulting Practice. "Plan sponsors may want to review not only their investment policy but their benefit design and funding policies if they believe we’re in this low rate environment for the long haul"

Aon Hewitt believes the following trends are likely to continue in 2013:

· Mega risk transfer deals: 2012 saw two large scale North American annuity buy-outs with GM and Verizon settling $26 billion and $7.5 billion of their retiree liabilities respectively both with the same insurer, Prudential. Some plan sponsors that believe low interest rates are here to stay may opt to remove pension risk from their balance sheet as it negatively affects their stock price. Canadian insurers hope to see the first $1 billion buy-in or buy-out deal this year.

· Diversification out of equities: Plan sponsors who do not envision an early exit from their defined benefit plans, may opt to continue diversifying the growth component of their pension fund into alternatives and hedge funds mainly to reduce market risk while preserving their return expectation. Many alternative asset classes are now available to smaller investors through pooled funds.

· Delegation of responsibilities: Some sponsors concerned about the level of oversight and governance needed to effectively manage their defined benefit plans especially as they approach their endgame may choose to delegate some or most of their responsibilities to a third party who will then implement a de‑risking and an eventual annuity settlement strategy.

The problem about getting an annuity today is that, I think, the insurance company won’t pay for the current deficit. If interest rates don’t go up, the company won’t ever have the chance to reduce the deficit.

I’m hoping that one day our pension deficit will disappear with interest rates going up. This is the best answer I can give you for the moment.

Pension plans sponsored by S&P 1500 companies finished 2012 with the highest year-end deficit ever. The aggregate deficit for these plans grew to $557 billion as of December 31, up from $484 billion at the end of 2011.

The overall funded ratio for these plans also declined slightly, down 1% from the 75% ratio seen at the end of 2011.

“Despite U.S. and non-U.S. equity indices outperforming expectations, interest rates on high-quality corporate bonds declined by more than 80 basis points in the calendar year, driving discount rates down and plan liabilities up significantly, with the overall result a significant decline in funded status for most plans,” said Jonathan Barry, a partner with Mercer’s retirement consulting group.

The funded status deficit would have been worse if not for the estimated $60 billion in expected 2012 contributions made by these companies.

“We see a growing number of pension plan sponsors seeking to reduce the effect of defined benefit pension volatility on their balance sheets and cash funding requirements,” said Richard McEvoy, leader of Mercer’s financial strategy group.

“In 2012, we saw some landmark transactions in the risk transfer space, with Verizon, General Motors and Ford announcing various combinations of annuity purchase and participant lump sum offerings as a means of eliminating some plan liabilities. We anticipate this trend will continue in 2013 and beyond, as corporate defined benefit plan sponsors are becoming more focused on risk-management issues and many are poised to make significant changes.”

Whether they realized it or not, many Canadians did rather well in 2012 investing in companies that included Nintendo, Rolls Royce and MasterCard.

The odds are also good that many of us will one day reap the benefits of our holdings in Australian shopping malls, toll roads in Chile and the sale of a $964-million stake in Skype, which were just three of the more notable deals that passed last year through the ledgers of the Canada Pension Plan.

The fund behind Canada's largest single-purpose pension was worth just over $170 billion by the end of September 2012, up from some $152 billion in 2011, partly on the strength of investments that include overseas real estate and infrastructure, according to the Canada Pension Plan Investment Board.

The Toronto-based board has since 1997 invested the pension's funds on behalf of the government — tasked with helping keep the CPP, a key ingredient of so many retirement plans, in the black.

Residents of Quebec are paid through a separate pension, the QPP, which is Canada's second largest pension fund and is managed by Caisse de dépôt et placement du Québec. The Caisse, which manages not just the QPP but several other public pension and insurance plans, is also an aggressive investor in a wide range of domestic and international ventures, with net assets totalling $165.7 billion as of June 30, 2012.

Canadian funds are global leaders

CPPIB's investments returned 6.6 per cent for the end of its last fiscal year, back in March; just above the four per cent plus inflation the bookkeepers say is needed to keep the fund sustainable at current contribution levels.

CPPIB and other public Canadian pension funds, such as the Ontario Teachers' Pension Plan, are these days out-performing public pensions elsewhere in the world.

"They've clearly done a good job… it's been explosive growth," Paul Taylor, chief investment officer for fundamental Canadian equities at BMO Asset Management, said of of the investment board's management of CPP funds.

The investment income isn't currently needed to maintain pension payments. Those expenses are covered by CPP contributions, though that is expected to change in 2021. By that time, "a small portion" of the investment income will be needed to make ends meet, according to CCPIB.

"The growth of the overall asset pool has been meaningfully moved along by actual contributions versus market growth," says Taylor. Eight years from now, "we'll be paying more in benefits than we're collecting in contributions."

That and the overall poor state of retirement savings among Canadians have led to calls for changes to CPP.

Foreign and private equity

Last year saw CPPIB invest in AMP Capital Retail Trust, which is part owner of two prominent Australian shopping malls. It also paid $1.1 billion for a near-majority stake in five toll roads in Chile and almost tripled its initial investment in Skype when the online video call service was bought by Microsoft.

Those deals are in keeping with a trend at pension funds away from public equity. CPPIB's newly appointed and well-regarded CEO, Mark Wiseman, has said private equity, real estate and infrastructure are a better fit for the long view and relatively risk-averse tastes of CPPIB.

"We believe that private equity assets can produce risk-weighted returns that will outperform public equities in the long run,” he told the Globe and Mail in September 2012. CPP's holdings in publicly traded companies amounted to 33.2 per cent of the portfolio in June 2012, down from 45.7 per cent in June 2009.

The change "makes a lot of sense" says Taylor. "By keeping a big chunk of their assets away from the public market, they get away from all that short-term noise. They don't want to go on a roller-coaster."

CPPIB is also gradually adding more international investments. About 40 per cent of its portfolio was Canadian in 2012, and though the board says "a large part" of the fund will remain invested at home, the need for a diverse portfolio will over time see more of its cash go overseas.

"A strategy that invests predominantly in Canada would not be in the best interests of CPP contributors and beneficiaries," says CPPIB on its website.

Large deals closed recently in the U.S. include a joint effort to acquire cable TV distributor Suddenlink Communications and CPPIB's $400-million investment in the auto racing Formula One Group.

Upon closing the shopping mall deal, Wiseman also expressed a general interest in Australian investments in light of, among other things, the country's resilience during the recent global economic crisis.

Weapons, tobacco and Tootsie Rolls

Leo Kolivakis, publisher of the Pension Pulse blog and a former senior analyst at Caisse de dépôt et placement du Québec, applauds the board's recent deals in the U.S. but has some doubts about Down Under.

Australia's similarity to Canada — both are resource-based economies — does little for the diversity of CPPIB's portfolio, says Kolivakis, and there are signs of weakness in its real estate market.

"What concerns me about Australia is the same thing that concerns me about Canadian real estate … that consumers are over-leveraged," he said. "The housing bubble has burst over there, and it's going to burst over here as well.

"But having said that, these are smart guys, they've done their homework, and they don't need to sell tomorrow. They can keep an investment for a long time and sell when the time is right."

CPPIB invests in a dizzying array of companies — everything from Porsche, Coca-Cola and the maker of Tootsie Rolls to more controversial businesses such as alcohol and tobacco firms and some of the world's biggest weapons manufacturers, which might raise a few eyebrows among some of the fund's contributors. Anheuser-Busch, Imperial Tobacco and Lockheed Martin are among the portfolio's holdings, according to CPPIB's latest update.

The board is mandated by law to evaluate companies only by their investment potential; morals and politics generally don't enter the picture. And though some Canadians might not approve, changing the law that governs the CPP is exceptionally hard and requires the approval of two-thirds of the provinces representing two-thirds of the population, a point not lost on the politicians currently wrestling with how best to preserve the CPP for the future.

Despite non-stop political wrangling in the United States and Europe and a sluggish global economy, AIMCo is poised to rack up decent returns for 2012.

With just days to go before the year-end, Alberta Investment Management Corp. has posted a gain of about 10 per cent on its public-sector pension and endowment funds, which make up about three-quarters of its $70 billion portfolio.

If one includes the short-term and special-purpose funds AIMCo manages for the Alberta government — which are invested mainly in safe, low-return money market assets — the year-to-date return is about eight per cent, says AIMCo CEO Leo de Bever.

That’s about two per cent or $1.5 billion above the return for comparable market benchmarks before including costs, he says.

AIMCo’s costs equate to about 0.4 per cent of assets, which de Bever calls low for a complex, actively managed portfolio.

Although 2012 was a better year for equity markets than many expected, the veteran pension fund manager isn’t promising a repeat performance in 2013. In fact, de Bever warns that returns are likely to be poor, although it’s impossible to predict with any precision.

“Anyone who claims he has any insight into where markets are going on a six- or 12-month basis has an exaggerated notion of his own intellect,” he says.

“The situation right now is especially muddy because it’s driven by politics, not economics. If I saw a 20 per cent drop in equity markets, that to me would be the signal to pile in. But is that going to happen? My guess is not.”

Instead, de Bever expects a lot of meandering, sideways market action in 2013, which could leave the broad equity indexes little changed over the next 12 months.

“My guess would be that after a relatively strong 2012, 2013 could be very tepid. As in either a small loss or just treading water,” he says.

“We’re trying to find substitutes for bonds, because that’s where we think the biggest risk is. And we’re keeping a normal weight for equities, trying not to be exposed to a growth story because there is no real growth,” he says.

“The difficulty is that the dividend stocks have been bid up in price to such a degree that a lot of that benefit is gone. So if I had to say whether our equity returns will be higher or lower than in 2012, I’d say they’ll be lower.”

Although he didn’t mention it, de Bever’s subdued outlook for stocks is consistent with the low returns that the Shiller P/E index currently implies. The closely followed stock market metric, devised by Yale University professor Robert Shiller, reflects the average price-earnings multiple for U.S. stocks over the last 10 years.

The Shiller P/E currently sits in the low 20s, well above the long-term average of 16. Although it has soared to as high as 45 at past market peaks — as it did in 2000, before the markets tanked — the current, slightly elevated level suggests this isn’t the ideal time to load up on equities.

On Wall Street, it’s a different story, however. As always, the spirit of sunny optimism prevails and most market watchers are bullish.

Barron’s, the influential U.S. investment weekly, says the Wall Street strategists it polled for its annual year-end outlook piece are calling for an average gain of 10 per cent for the S&P 500 Index next year.

Their forecasts for the index ranged from a high of 1660 — implying a gain of 15.6 per cent from Wednesday’s closing level — to a low of 1434, which would leave the S&P 500 largely unchanged for the year. Not a single strategist sees markets declining in 2013.

According to a separate poll of 49 forecasters conducted by Bloomberg News, precious metals will lead returns for all asset classes in 2013, with gold prices expected to reach $2,000 US an ounce, up from about $1,670 currently.

For his part, although he believes stock markets face significant near-term risks, de Bever believes equities will outperform bonds over the next decade.

“Right now, when you look at volatility levels in the stock market, there seems to be this notion that there’s no problem whatsoever, and of course that isn’t true. We’ve got a significant recession risk and a significant fiscal risk, so my sense is that stock markets aren’t particularly cheap,” he says.

“But if I had to be Rip Van Winkle and wake up 10 years from now, I think stocks are the better place to be, even on a risk-adjusted basis, because the returns on bonds just won’t be there,” he argues.

“Right now, people are scared. They almost don’t care about making any income. They’re just more concerned about not losing any capital. But at some point that’s going to change.”

Nicholas van Praet of the National Post reports, Caisse de depot invests US$500M in Canadian and U.S. wind farms:

Canadian pension fund manager Caisse de dépôt et placement du Québec is pumping $500-million into a portfolio of wind power farms owned by Chicago-based clean energy developer Invenergy LLC, its largest direct investment to date in renewables.

The money gives the Caisse a material financial interest in 13 wind fields, including 11 in the United States and two in Canada. Among the assets is Le Plateau, a 138.6-megawatt project in Quebec’s Gaspé region that sells all of its power to Hydro-Québec under a 20-year contract.

For the Caisse, the stake fits with chief executive Michael Sabia’s strategy to shift more money away from riskier but potentially more lucrative shorter-term assets into those that generate stable and long-term returns. All the wind farms the Caisse is buying into have secure multi-year sales agreements in place for their power, from which the pension fund will receive a portion of revenues.

“We think [renewables is] a sector that’s very attractive in the future… and that we wanted to have more exposure to,” the Caisse’s senior vice-president of infrastructure, Macky Tall, said in an interview Tuesday. “The cost of wind power has been progressing over time, the technology is evolving and will continue to evolve… What we are doing is investing in projects which are already operating.”

The Caisse’s other renewable energy investments include a stake in Longueuil, Que.-based power producer Innergex Renewable Energy Inc., in which it added a $98.9-million position this past summer. It also provided $25-million of debt for the Boralex Inc.-led Beaupré Wind Farms project, just north of Quebec City.

Partnering with Invenergy also allows the Caisse to balance out its heavy investment in Alberta’s oil sands, frequently criticized by environmental activists and other Quebecers.

“I’ve been to conferences recently where people accused the Caisse of investing in dirty power,” said Michel Nadeau, a former Caisse vice-president who is now executive director of Montreal’s Institute for Governance of Private and Public Organizations. “This gives them some energy diversification. And I think that’s a prudent course. A big money manager like the Caisse can’t take chances on one or another [energy technology]. It has to spread out its investment.”

According to U.S. regulatory filings, the Caisse had roughly $4.7-billion worth of equity invested in oil sands companies as of the end of September, including some $605-million in Suncor, $286-million in Cenovus Energy Inc. and $200-million in Imperial Oil Ltd. Its largest investment is in Enbridge Inc. with a stake valued at $1.8-billion.

Enbridge has six wind farm and three solar energy projects in North America, but its main business is transporting oil and natural gas by pipeline. The company is seeking federal and provincial approval for a project to bring Western crude east to Quebec refineries. Quebec and Alberta are jointly studying the proposal.

For Invenergy, the Caisse’s interest marks yet another vote of confidence in its management, led by well-known energy magnate Michael Polsky. The company, which is the largest independent wind power producer in North America, has raised more than $7-billion of financing from banks and other investors over the last decade to fund its business.

Invenergy typically owns and operates each facility that it develops, with 7,000 megawatts of power generation projects in development or in operation. Most of those are wind farms. Company officials declined an interview request.

Despite all the hype, clean energy excluding hydropower is projected to account for less than 10% of U.S. energy supply by 2040 and the industry cannot compete without tax credits provided through public money, Washington-based energy economist Charles Ebinger argued in a blog posting Monday.

He said under the new fiscal deal just negotiated, the wind industry will receive US$12-billion in aid over the next decade. He argues U.S. lawmakers should instead stoke the development of domestic natural gas reserves and approve TransCanada Corp.’s Keystone XL oil pipeline carrying crude from Alberta to U.S. markets.

“Every leading energy forecast [is] suggesting that for at least the next 30 to 40 years the world will remain dependent on fossil fuels which we have in untold abundance,” Mr. Ebinger wrote. “It’s time to get on with the job, find ways to strip out [carbon dioxide] from our oil, coal and gas production and to utilize what we can while sequestering the rest.”

Larry Pynn of the Vancouver Sun reports, B.C.’s public-sector pension invests millions in Enbridge, tobacco stock:

B.C.’s public-sector pensions are investing billions in Enbridge Inc. and other oil giants at the same time that public opinion in the province is strongly against projects such as Northern Gateway and the Alberta oilsands.

The B.C. Investment Management Corp. — the major investor of public pension funds — has $405.6 million invested in Enbridge, whose Northern Gateway project seeks to deliver bitumen from Alberta by pipeline to Kitimat to be exported by coastal tankers. A poll last month showed 60 per cent of British Columbians oppose the project.

BCIMC’s diversified portfolio also include $197.5 million in two British American Tobacco companies, $134 milllion in Philip Morris, $36.6 million in Imperial Tobacco, and $21.9 million in Japan Tobacco Inc., according to the corporation’s latest investment list dated March 31, 2012.

In 2011, the Alberta government directed the Alberta Investment Management Corp. to divest itself of ownership in tobacco companies, although tobacco remains in the portfolio of the Canada Pension Plan.

B.C. and other provinces are suing tobacco companies to recover the costs of tobacco-related health-care costs.

BCIMC has also invested close to $5 million in three Kinder Morgan companies. Kinder Morgan is seeking to twin its 1,150-kilometre pipeline to carry Alberta oilsands diluted bitumen to Burrard Inlet, requiring increased tanker shipments through Burrard Inlet.

Gwen-Ann Chittenden, manager of corporate initiatives for BCIMC, said in an interview on Thursday that the corporation has a “fiduciary obligation” to get the best return on its investments, even if that involves controversial companies and products.

“Our job is to deliver the returns that our clients require to fund their pensions,” she said from Victoria. “We do acknowledge that not all plan members will support every investment decision we make and will hold varying and conflicting views, but we have to prudently invest and do whatever we can to maximum the return ... within a given level of risk.

“Investing responsibly is not always about owning clean and green investments. It’s doing what we can to ensure the long-term financial status of the plans.”

(Employees of The Vancouver Sun and Province are among those whose pension investments include Enbridge bonds, Media Union president Mike Bocking confirmed.)

Chittenden noted that when BCIMC invests in a company, it has the potential to exert influence for the better, including by putting a representative on a board of directors. She encouraged individuals who are concerned about certain investments to raise the issue with their local pension board of trustees, who can then address the issue with BCIMC.

BCIMC represents the pension investments of more than 500,000 members of the public sector — including provincial and municipal employees, post-secondary institutions, health-care workers, police and firefighters, teachers, etc. It administered $92.1 billion in assets as of March 31, 2012, including insurance funds.

Bob Walker, a vice-president with NEI Ethical Funds in Vancouver, said it is difficult to avoid investing in energy companies given that they are such a major component of the Canadian corporate landscape.

“Investing in oil and gas and basic materials is a fact of life in Canada,” he said. “It’s pretty hard to escape. Our approach is to engage those sectors ... to improve performance. The saying is: ‘You can’t change a company you don’t own.’ It’s a more effective approach than avoidance.”

NEI draws the line at investing in nuclear power, tobacco companies, and certain military weapons such as landmines.

Walker noted that both NEI and BCIMC are signatories to the United Nations Principles for Responsible Investment, a global coalition representing more than 1,000 signatories and $30 trillion in assets under management.

Gwen Barlee of the Wilderness Committee called for a public groundswell to erase the “massive disconnect” that allows pension investments in areas such as the “dirty” Alberta oilsands.

Barlee said pension funds for the University of Victoria, which claims to be socially and environmentally progressive, have more than $4 million invested in Enbridge and more than $50 million in oilsands and other oil and gas producers and transporters,

“To say I am astounded is an understatement,” said Barlee, a UVic alumnus.

Last December, encouraged by 350.org (a U.S.-based group fighting investments in fossil-fuel companies, including by colleges and universities), Seattle Mayor Mike McGinn said he supported divesting from certain companies, including for city employee pension funds.

“That’s the right move,” Barlee said. “It sends an important moral message to society and to the markets — that these products that are part of the pension plan are not sustainable and are not green.”

Enbridge and Kinder Morgan are certainly not the only oil-industry companies that BCIMC has money in. Others include: $659.8 million in Suncor Energy, $381.1 million in TransCanada Corp., $317.3 million in Exxon Mobil Corp., $158.8 million in Royal Dutch Shell, $132.4 million in Encana Corp., $105 million in Crescent Point Energy Corp, and $98.2 million in BP PLC (the company involved in the 2010 Deepwater Horizon disaster in the Gulf of Mexico).

Others include: $96 million in Imperial Oil, $81.4 million in Husky Energy, $75.8 million in Occidental Petroleum Corp., $52.3 million in Anadarko Petroleum Corp., $36 million in Vermilion Energy Inc., $29.9 million in Pembina Pipeline Corp., $23.9 million in Tourmaline Oil Corp., $20.3 million in Duke Energy Corp.

BCIMC also holds equity investment in weapons manufacturers BAE Systems ($11 million), General Dynamics ($15.7 million), and Lockheed Martin ($16.3 million).

Richard Watts of the Times Colonist also reports, UVic urged to cut Enbridge pension ties:

Environmentalists are calling on faculty and other professional staff at the University of Victoria to divest their pension investments from the controversial pipeline company Enbridge.

The Western Canada Wilderness Committee has gone through the pension plan investments for people at UVic and found the plan serving faculty has about $4 million invested in Enbridge.

“We want [UVic] to get their money, their pension funds, their endowments out of companies like Enbridge,” said Torrance Coste, Wilderness Committee campaigner

Calgary-based Enbridge Inc. is seeking to build a 1,150-kilometre pipeline, the Northern Gateway, to carry bitumen, a heavy, tar-like substance from the Alberta oilsands to Kitimat. There it would be loaded onto tankers for shipment to refineries overseas.

A federal review panel, holding hearings into the proposal, has been told that the pipeline is too risky, causing great harm to the environment if it leaks.

Kristi Simpson, member of the board of trustees for the UVic pension plan with the money invested in Enbridge, said it’s important to remember the pension plan is not part of the University of Victoria.

It belongs to its professional employees and faculty members. The plan is administered at arms length by trustees who hire investment managers.

Under B.C.’s Pension Benefit Standards Act, the pension must be administered in line with the best financial interests of plan members. So things such as climate change, pollution or the ethics of an investment aren’t up for consideration.

“The position of the Wilderness Committee is not something the board of trustees could consider,” Simpson said. “They need to look after the best interests of the plan members.”

But Andrew Weaver, UVic climate scientist and announced Green Party political candidate, said he believes ethics and environmental concerns should be part of a pension trustees’ thinking.

Weaver said he realizes the issue is complicated. Trustees are bound by law. Also, a good argument can be made that shareholders can influence the behaviour of companies in which they hold a stake. But he said there should be discussion on how things like pension funds can be administered with ethics in mind.

“I don’t think it’s the be all and end all to just say ‘;the fiduciary responsibility means we can’t,’ ” he said.

UVic student Matt Hammer, the responsible investment co-ordinator for the university environmental group, CommonEnergy, said calls for divestment should be made with caution.

The pension plan secures the future of thousands of members and must be treated carefully, he said.

“There are options out there where you can maintain financial responsibility while still making ethical decisions.”

Enbridge could not be reached for comment.

...bcIMC is one of the best, most ethical pension funds in Canada with first-rate governance which ensures alignment of interests between their managers and stakeholders.

David Cameron today defended the Government's plan to introduce a single "flat-rate" state pension which could result in some workers facing higher National Insurance contributions to pay for it.

Mr Cameron said plans for a unified pension rate - equivalent to around £144 in today's money, and due to be introduced for new pensioners from 2017 was "fair".

"This will help a lot of women and a lot of lower paid workers who otherwise wouldn't get a decent state pension," said Mr Cameron.

Ministers said the reform will create a simple flat-rate pension set above the means test (currently £142.70) and based on 35 years of National Insurance contributions, and will "hugely benefit" women, low earners and the self-employed, who under existing rules find it almost impossible to earn a full state pension.

However around six million workers will face higher National Insurance payments in future as the practice of "contracting out" the state second pension to employers is ended.

Those affected are expected to include more than a million private sector staff enrolled in final salary schemes, and an estimated five million public sector workers.

The GMB union said there could be "very serious consequences" which could affect an agreement on public sector pensions, while the National Pensioners Convention (NPC) described today's White Paper as little more than a "con trick" for future generations, by offering them less than they get now, asking them to pay more and work longer before they can get it back.

But ministers will argue that, by replacing today's complex system of add-ons and means-testing, the single tier will provide certainty to people about what they will get from the state and provide a better platform for them to save for their retirement.

Work and Pensions Secretary Iain Duncan Smith said: "This reform is good news for women who for too long have been effectively punished by the current system.

"The single tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family."

Pensions Minister Steve Webb said: "The current state pension system is too complicated and leaves millions of people needing means-tested top-ups. We can do better.

"Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save."

Brian Strutton, national officer of the GMB union, said a new flat-rate pension should be fairer than the present arrangements, but warned of a "very serious consequence" of the Coalition's plans.

"That is the increase in National Insurance contributions that employers and employees in defined benefit pension schemes will have to pay," he said.

"For employers that is 3.4% of the NI ranking earnings and for the six million employees affected it will be an extra 1.4%. Most DB scheme employers and members will find this unaffordable so will need to renegotiate their schemes.

"A good example is the Local Government Pension Scheme which has just been reformed by unions and government and would face an unaffordable extra NI bill of several hundred million pounds.

"Just as the Treasury legislation to reform public sector pensions is going through Parliament, the Department for Work and Pensions (DWP) is proposing to blow it all out of the water by completely rewriting the state and occupational pension landscape."

Mr Strutton said the Treasury and DWP needed to "get their act together" to avoid reopening the public service pension deals, adding: "Abolition of the contracting out NI rebate will impose a £6 billion new tax burden on workers and companies which may be a nice windfall for the Chancellor but is not fair to those who will have to pay more tax."

Unions have been embroiled in a bitter dispute with the Government over its controversial public sector pension reforms, which led to a series of strikes.

An agreement was struck in local government, but unions in other areas have refused to sign up to new arrangements.

NPC general secretary Dot Gibson said: "The White Paper offers nothing to existing pensioners and leaves many of them to struggle on lower pensions and a complicated means-testing system.

"The worst affected will be around five million older women who don't have a pension anywhere near £144 a week and would clearly benefit if they were included in the new arrangements, but look like they are going to miss out.

"This will only add insult to injury to millions who have already made a contribution to our society but are still living in poverty.

"The outlook for future generations of pensioners is even worse. They are being asked to pay an extra five years worth of National Insurance contributions, work longer before they can retire and end up with less than they can get today. At the moment you only need to contribute for 30 years in order to get a full state pension, and if you do, you can get £150 a week when you retire at 65.

"What the Government is trying to sell is a plan for people to pay in for 35 years, get £144 a week and have to wait at least until 68 before they can collect it. No-one should be taken in by what is little more than a con trick."

Shadow pensions minister Gregg McClymont said the Coalition had originally suggested the reforms would be introduced in 2016.

"The chaos surrounding the Government's relaunch gets worse and worse. These pensions proposals are just half a plan yet they are still delayed by a year," he said.

"With the granny tax, this Government has already established a track record of incompetence and secrecy so we will look at the detail, but the Government should come clean immediately and set out exactly who the losers are."

Joanne Segars, chief executive of the National Association of Pension Funds, said: "The end of contracting out will become a key issue in both the private and public sectors as the Government moves towards a much-needed overhaul of our state pension.

"The transition will have to be handled very carefully to ensure a fair result for employers and savers."

Paul Johnson, the director at the Institute for Fiscal Studies (IFS), said that in the long-term “most people will end up with a lower pension than they might otherwise have thought”.

Mr Johnson’s comments came as David Cameron said the state pension will make the system “much simpler” but will lead to people retiring later.

From 2017, the basic state pension will be set at about £160 a week and the complicated system of means-tested “top-ups” will be scrapped.

Employees will have to spend five more years working to qualify for the full state pension, and younger people face the prospect of working into their seventies.

To help fund the extra costs of the scheme, millions of workers with final-salary schemes, particularly in the public sector, will also have to pay more tax and the second state pension will be phased out in future.

Under new plans to be unveiled by ministers today more than 750,000 women in their fifties will also receive an extra £468 annually when they retire.

The current full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit, and by the state second pension.

Mr Johnson said the “clear beneficiaries” of the pension reforms would be the self-employed, but he warned that “most people” will be faced with lower pensions.

“At the moment there is a basic state pension of £107 a week,” Mr Johnson told BBC Radio 4’s Today.

“It, plus the state second pension, which is the earnings-related bit which you earn on top - the two of those will eventually be abolished and they’ll be replaced by this thing at £144 a week in current terms.

“Now the point is that for most people, the total value that they are currently earning, of their basic pension plus their state second pension, if you add those together in the future will be more than £144 a week. So, while in the short-run there’ll be a bunch of winners from this, in the longer run, most people will end up with a lower pension than they might otherwise have thought.”

Mr Johnson added that the “self-employed will be the one group who are unequivocally better off in the long run because at the moment they’re not earning any state second pension”.

The Prime Minister said that if people want to have a “decent state pension” then British workers will have to “work a bit longer”.

Speaking to ITV’s Daybreak the Prime Minister said the new reforms “will help a lot of women” and “low-paid people”.

“[The new system will be] much simpler,” Mr Cameron said. “A single state pension cuts out a lot of the means-testing and also will help a lot of women, a lot of low-paid people who otherwise wouldn’t get a good state pension.

“So a good idea, but it’s long-term. This is for new pensioners, I don’t want to mislead anyone.”

The Prime Minister confirmed that the retirement age would rise under the plans.

He said that it is “reasonable” to expect that people spend a third of their adult lives working.

“We are going to have later retirement ages because we’re living longer,” Mr Cameron said.

“And I think if you want to go on having a decent basic state pension, which we do, you have to either put up taxes or ask people to work a bit longer.

“And I think it’s fair to ask people to work a bit longer because we’re living longer. So the idea that you should spend about a third of your adult life in retirement seems to me a reasonable one.”

In an article for today’s Daily Telegraph, Steve Webb, the pensions minister, says that the “complicated and divisive” pension system must be reformed to “reflect modern working patterns and modern patterns of family life”.

Mr Webb said the reforms will “particularly benefit many older women, whose time at home with children has damaged their state pension entitlements”.

In today’s article, Mr Webb says: “Beveridge’s original idea was for a single, simple, decent state pension, paid after a lifetime of National Insurance contributions. We have moved an awfully long way from that vision.” He adds: “Thanks to a complicated and divisive system introduced by the last government, millions of pensioners require top-up amounts to get their pension up to a decent minimum. However, this means that those with small amounts of additional savings often find themselves only slightly better off than someone who never bothered to save.”

People will have to work longer to qualify for a full basic state pension under long-awaited plans for a flat-rate retirement benefit.

David Cameron, prime minister, said on Monday that the changes were a “major advance” and a “simplification” of the system, which would be fairer for women and the low paid.

He criticised the current system – where the basic pension is lower but combined with tax credits – as “too complex” and too dependent on means testing.

Steve Webb, the pensions minister, will say on Monday that people will have to work for 35 years, up from 30, to be eligible for the full pension, set at about £144 in today’s money. To limit the cost of the changes, due to be in place by 2017, the government is expected to say that people will have to be in employment for a minimum period of up to 10 years to qualify for any single-tier pension payment. Since 2010, no such minimum has existed.

Iain Duncan Smith, the work and pensions secretary, said the reform would particularly benefit women who had been “effectively punished” by the current system. More would qualify for a state pension in their own right, even if they had taken time out to care for a family.

However, ministers are worried that the announcement risks being overshadowed by a row over the number of potential losers.

People who have “contracted out” of the state second pension by joining an occupational pension scheme face losing their national insurance rebate, which could amount to a tax rise of 1.4 per cent of pay.

However, in an important concession disclosed in the Financial Times on Saturday, the government is expected to allow that group to build up annual credits to offset the loss of the rebate and boost their entitlement.

An austerity-bound Treasury can still expect a windfall from the abolition of the rebate, since the bill for the credits will fall due only once those individuals reach state pension age, perhaps in as much as 20 years’ time.

The white paper will also, for the first time, outline a mechanism through which the state pension age will rise in line with increasing life expectancy. It is expected to recommend that the age should be reviewed at least once during the life of each parliament and a minimum of 10 years’ notice be given for any change.

Michelle Mitchell, director-general of Age UK, the charity, said the proposals would make the system fairer, simpler and easier for people to plan for retirement.

The activist investor whose firm last week disclosed that it bought a stake in Morgan Stanley has started prodding the securities firm about how much it pays top executives.

Daniel Loeb, who runs hedge-fund firm Third Point LLC, has raised questions about whether compensation levels at Morgan Stanley are justified given the New York company's size and relative simplicity compared with larger banks, said a person familiar with his thinking.

Mr. Loeb hasn't singled out any executive he thinks is overpaid. But the questions indicate a tougher stance by Third Point than it let on in Wednesday's announcement of the purchase of an unspecified number shares of Morgan Stanley, which it said "is in the early innings of a turnaround."

In a letter to clients last week that was viewed by The Wall Street Journal, Third Point criticized Morgan Stanley's pay for directors, which surpassed J.P. Morgan Chase & Co. and Citigroup Inc. "although Morgan Stanley is a substantially smaller and simpler bank."

Mr. Loeb now is scrutinizing pay practices at Morgan Stanley more widely, including the compensation of Chairman and Chief Executive James Gorman. In 2010 and 2011, executives whose pay is disclosed in proxy filings by the company received a total of $130.1 million, up from $50.1 million in 2008 and 2009, when many took little or no bonus because of the financial crisis.

Morgan Stanley is expected to disclose later this month the stock-based compensation for its top officers. Many employees will learn this week the size of their 2012 bonuses, and some overall details are expected when it reports fourth-quarter results Friday. Payouts are likely to fall from a year ago, people familiar with the firm said.

Mr. Loeb has indicated to people close to him that in some cases he feels the pay is appropriate, given the tricky balancing act needed to hold on to talented employees and placate restive shareholders while Mr. Gorman tries to rejuvenate the company.

Last week, Third Point said Morgan Stanley shares "should nearly double" if Mr. Gorman continues to build up the brokerage business and works on a "bold fix" for "struggling" bond-trading businesses. On Monday, Morgan Stanley shares slipped 10 cents to $20.07 in New York Stock Exchange composite trading at 4 p.m. The stock price peaked near $90 in 2000.

A Morgan Stanley spokeswoman said that Mr. Gorman "reached out to Mr. Loeb and welcomed him as a new investor and said he was pleased that Mr. Loeb shared his view on the future upside performance of Morgan Stanley and its stock."

Mr. Loeb, chief executive of Third Point, which manages about $10 billion in assets, concluded that Ruth Porat, a former investment banker who became Morgan Stanley's finance chief in 2010, is fairly compensated, according to a person familiar with his thinking. Last year, she was awarded an $8.75 million package of cash, shares and other deferred compensation, ranking fourth among the chief financial officers at six big U.S. banks. The fund manager made his decision about Ms. Porat's pay after speaking to people who know her well, this person added.

Morgan Stanley is smaller than many of its fiercest rivals in trading, investment banking and pitching stocks and bonds to investors, yet it still has a complex balance sheet and substantial operations in risky markets such as derivatives and commodities. Since taking the top job in 2010, Mr. Gorman has been trying to build up relatively stable businesses such as retail brokerage, while turning around struggling units like bond trading.

"If we did not believe Morgan Stanley's management was up to these important tasks, we would not own such a significant position," Mr. Loeb's firm told clients last week in its letter.

One potential source of friction likely will be resolved when Morgan Stanley director Roy Bostock, 72 years old, retires this spring.

Last week's letter criticized Mr. Bostock, a former Yahoo Inc. chairman, without identifying him by name. Mr. Loeb clashed with Mr. Bostock until the hedge-fund manager muscled his way onto Yahoo's board as part of a Third Point-led shake-up. Mr. Bostock couldn't be reached Monday for comment.

In investment banking, some critics have called on Morgan Stanley to lower compensation for Michael Grimes, the star technology banker who helped take Facebook Inc. public last May. Mr. Grimes's pay in 2011 was an estimated $6 million.

Facebook stock is down nearly 20% since then, and Morgan Stanley last month agreed to pay $5 million to settle allegations from Massachusetts regulators that Mr. Grimes tried to improperly influence research analysts before the initial public offering. The firm didn't admit or deny the allegations.

The deferred bonuses will be paid out over a three-year period, meaning that employees will not receive their full bonuses for 2012 until the end of 2015. It could not be determined what the level of bonuses will be.

The bonus details will be communicated to employees on Thursday, said the sources, who asked not to be named because the matter is not public.

Mark Lane, a Morgan Stanley spokesman, declined to comment.

One source said the change is being made to better align employee incentives with shareholders and to appease regulators.

Under the new bonus plan, which will paid out half in cash and half in stock, high earners will receive 25 percent of their cash bonus in May, another 25 percent in December, another 25 percent in December 2014, and the final 25 percent in December 2015, according to two of the sources.

For the stock portion, 25 percent of the equity award will be paid out at the end of this year, 25 percent at the end of 2014, and the final half at the end of 2015, the sources said.

Employees who make less than $350,000 annually and whose bonuses total less than $50,000 will receive their full cash bonuses in February, one of the sources said.

"The real problem with the signing bonuses is that pressure that the new firms put on their bonus babies to generate large commissions by promoting special products of the new firm to pay off those bonus costs. This problem dates back some thirty years and lead to the demise of Bache & Co. selling their oil and gas (limited) partnerships. As hard as the (Securities Industry Association) federal regulation committee, on which I served, tried to stop this practice, we never could," Madoff writes.

California's massive public employee pension system gained more than 13% in investment returns last year, most of it from stocks and real estate, the agency said.

It was the best year for the California Public Employees' Retirement System since 2006, when the fund gained 15.7%. CalPERS investments were up 1.1% in 2011 as it struggled to regain its footing after the Great Recession.

With more than $250 billion in assets, CalPERS is the largest public employee pension fund in the U.S. The agency administers retirement benefits for more than 1.6 million current and retired state, school and local government employees and their families.

Though it released returns for the calendar year, CalPERS reports on a fiscal year ending June 30. And its returns in the first six months of its current fiscal year were 7.1%, slightly below the 7.5% it had assumed it would gain for the full fiscal year.

"We're definitely pleased," said Joe DeAnda, a CalPERS spokesman. "Our hopes are that the performance will continue along these lines."

Investment returns are significant because they help dictate the amount of money that government agencies have to contribute to provide retirement benefits for employees. The importance of the fund's investments was magnified in 2008, when it lost 28% amid the global economic crisis and recession.

Rob Feckner, president of the CalPERS board, said he remains optimistic about the fund's future.

"As we emerge from this recession, I am positive we will continue on the path of improved transparency, accountability and ethics," he said.

Boosted by stocks and real estate, CalPERS' investments bounced back strongly last year.

The big pension fund said Monday it earned a 13.3 percent profit on its portfolio in calendar 2012.

That's significantly higher than the California Public Employees' Retirement System's official investment forecast of 7.5 percent.

It's also a major improvement on the fiscal year that ended last June 30, when CalPERS earned just 1 percent.

The $252 billion pension fund's investment returns are crucial to the finances of state and local governments. The more money it earns, the less likely it is to press its member agencies for higher annual contributions. The state contributes around $3.5 billion a year to CalPERS.

The higher investment returns were spread across a broad category, with spokesman Joe DeAnda citing "strong gains in global stocks and real (estate) assets."

Stocks gained 17.2 percent. Real estate gained 12.8 percent, as the portfolio continues to rebound from huge losses suffered during the housing market meltdown.

CalPERS has restructured its real estate portfolio to focus on more conservative holdings, such as leased-up office buildings and industrial sites.

The private equity portfolio, consisting of investments in companies that aren't publicly traded, earned a 12.2 percent return.

The results were announced at a CalPERS board meeting in Monterey.

CalPERS 13.3 percent return for the 2012 calendar year was led by strong gains in global stocks and real assets including stakes in office, apartment, industrial and office buildings. Public Equity earned a 17.2 percent gain while Real Assets garnered a 12.8 percent return.

The remainder of CalPERS asset classes also showed positive results as follows (click on image):

The California Public Employees' Retirement System, the biggest U.S. pension fund, posted a return of 13.26 percent in the 2012 calendar year, its chief investment officer said on Monday.

The fund's 2012 return was below a 14.43 percent benchmark, largely as a result of its returns on private equity assets, Chief Investment Officer Joseph Dear said at a meeting of the fund's board to discuss strategic issues.

The $252 billion pension fund, best known as Calpers, posted a 12.24 percent return last year on it private equity assets, compared with a sector benchmark of 28.45 percent.

For the current fiscal year to date, Calpers has posted a 7.09 percent return. The pension fund has a target of an annual return of 7.5 percent to meet its obligations.

Separately, at its meeting in Monterey, California, the Calpers board re-elected Rob Feckner to a ninth term as its president.

Feckner has been on the board since 1999 and has led it in a soft-spoken manner while pressing Calpers' corporate governance and shareholder activism campaigns and as the fund seeks to recover from steep losses from the financial crisis.

Investments held by the fund, best known as Calpers, peaked at about $260 billion in 2007 and sank to a low of $160 billion in March 2009.

The Calpers board also re-elected George Diehr to a sixth term as its vice president.

The California Public Employees’ Retirement System, the largest U.S. pension at $252.3 billion, earned about 13 percent on invested assets last year, led by increases in stocks and private equity.

That compared with a 1.1 percent return in 2011, according to the fund. Private-equity investments, whose reporting lags behind the rest of the results, climbed about 12 percent for the year through September, less than half the target rate, Calpers said yesterday. Publicly traded shares rose about 17 percent, meeting goals for the period ending Dec. 31.

Public pensions such as Calpers have been under pressure to boost investment returns following historic declines stemming from the global financial crisis and the 18-month recession that ended in 2009. In 2008, the Sacramento, California-based system lost almost 28 percent on investments.

“In pension-fund time, one year isn’t a long time,” Chief Investment Officer Joe Dear said at a Calpers board meeting in Monterey. “I’m pleased, but not excessively so.”

The fund has about 74 percent of assets required to meet long-term obligations, according to Calpers. When the pension’s investments underperform benchmarks, the state and municipalities must make up the difference.

Below Threshold

For the first half of fiscal 2013, invested assets rose 7.1 percent. That’s an improvement from fiscal 2012, which ended June 30, when it earned just 0.1 percent. It was the third year in five that Calpers failed to reach the 7.5 percent threshold needed to meet projected obligations, data show.

For fiscal 2011, the system’s assets earned almost 21 percent, the best result since at least 1990, led by gains in stocks and private equity.

Following the historic declines, the fund set about restructuring its real-estate holdings, inserting more risk controls into investment decision-making, hedging some holdings against inflation, and allowing managers to better coordinate between asset classes.

Still, with half its assets invested in stocks, the fund is subject to market volatility. Its 10-year return as of Dec. 31 was about 7.5 percent.

Ivanhoe Cambridge Group broke ground Tuesday on Chicago’s largest commercial real estate project in five years, despite not having yet signed an anchor tenant.

In May, the real estate wing of Quebec pension fund manager Caisse de dépôt et placement du Québec announced it was backing a $300 million, 45-storey LEED gold office tower through a partnership with U.S. developer Hines. The River Point tower, for delivery in 2016, is being built with 900,000 square feet of leasable space in Chicago’s West Loop financial district.

“We are moving ahead because we see a growing economy in Chicago and the demand for this type of high-calibre office space is growing rapidly,” Ivanhoe Cambridge spokesperson Sebastien Théberge said in an email. “This building will be attractive to the firms that are expanding or relocating to the city.

“There is a lot of interest and we are making good progress with a number of potential tenants.”

Located near two rail hubs, River Point will also include a 1.5-acre public park atop the existing rail infrastructure.

In May, commercial brokers told The Gazette that The River Point tower is the first of three proposed office projects to move ahead in Chicago. The last delivery of new office construction in Chicago took place during the first quarter of 2010 with the expansion of an existing building.

The Chicago tower is one of several major real estate projects underway in the United States backed by Canadian pension funds. In New York, Ontario-based Oxford Properties Group has partnered with an American partner to develop the $15-billion Hudson Rail Yards, a so-called mini-city on the west side of Manhattan that’s to have more office space than all of Portland, Ore.

According to a recent Wall Street Journal article, Canadian pension funds have poured about $9 billion into U.S. commercial real estate in the past three years.

Faced with a stubbornly slow and uneven global economic recovery, more countries are likely to resort to cutting the value of their currencies in order to gain a competitive edge.

Japan has set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate the moribund growth pace. (Read More: Japan PM Says BOJ Must Set 2% Medium-Term Inflation Goal)

Economists in turn are expecting others to follow that lead, setting off a battle that would benefit those that get out of the gate quickest but likely hamper the nascent global recovery and the relatively robust stock market.

While respective countries would have their own versions, the moves would follow three years of aggressive bond buying from the Federal Reserve as part of its $3 trillion quantitative easing program.

Though critics worry about the long-term consequences, the three rounds of QE have managed to keep the U.S. economy afloat and have boosted risk assets such as stocks and commodities.

"Ever since the Fed launched QE2 in August 2010, we have been in the currency-war regime," said Alessio de Longis, portfolio manager of the Oppenheimer Currency Opportunities Fund. "It will continue to be this."

In a late-2012 announcement, outgoing Bank of Japan leader Masaaki Shirakawa indicated an aggressive easing program that would total 50 trillion yen over the next year or so.

The move is part of Abe's plan to get the country out of its two-decade deflationary spiral, but has generated mixed reaction.

"The economic policies of the new administration are set to be centered on loose monetary policy and fiscal pump-priming," Citigroup analysts said in a research note. "However, experience suggests this is unlikely to lead to a sustained revival of the Japanese economy."

Still, a declining yen would help Japanese exports and put upward pressure on other currencies, something unlikely to be tolerated by its competitors.

The massive Fed balance sheet expansion has resulted in the U.S. dollar declining about 11 percent against a basket of world currencies since QE began in 2009. In the meantime, stock prices have doubled since their March 2009 lows and the Morgan Stanley Commodity Related Index has gained about 80 percent.

With the U.S. as its guide, competitive devaluation is expected to accelerate.

Strategas investment strategist Jason Trennert included the "race to the bottom" as one of his five principle investment themes of the year.

"Recent actions on the part of the Fed, the ECB, the Bank of Japan, the Swiss National Bank, and the Bank of England all suggest that financial repression (or the perpetuation of negative real rates on sovereign debt) is likely to be the most enduring investment theme for the foreseeable future," Trennert said.

In 2012, global central banks cut interest rates some 75 times in an effort to create conditions that would spur growth.

Economists, though, expect growth to meander around 3 percent globally this year, a level generally considered to reflect little actual growth at all. (Read More: US Economy to Grow 2.5% This Year: Fed's Evans)

The hope, though, for those engaged in currency devaluation is that it cheapens the price of their goods globally and thus increases exports and creates positive inflation.

But the initial stages of inflation are usually bad for stocks and send investors to commodities and fixed income indexed for inflation, such as Treasury Inflation Protected Securities.

"So what could cause a market correction over the first half of 2013?" Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said in an analysis. "In our view it will either be 1) a rapid rise in interest rates and a re-run of the 1994 story; or 2) the economy fails to respond to the liquidity, forcing nations to devalue their currencies in an attempt to stimulate growth."

The Standard & Poor's 500 slipped about 4 percent in 1994, losing ground through year as the Fed tightened policy to control the recovery. Of course, a major bull run began the following year, with the index soaring 32 percent in 1995.

Though the release of the most recent Fed minutes scared some investors into thinking the Fed might normalize rates sooner than expected, those fears since have been largely dismissed.

Other central banks around the world are likely to take note. (Read More: Has Draghi Won the Battle With Financial Markets?)

"It is clear that many nations want/need a weaker currency – should China also feel the need for a weaker (currency)...then the risks of a risk-negative (currency) war would start to grow," Hartnett said. "Gold would rally sharply, but note a rise in gold prices and a fall in bond prices precipitated the 1987 crash."

He advised clients to keep a close watch on the Chinese yuan and the broader Asian dollar index.

Oppeheimer's de Longis adds the Colombian peso to that list as well as the New Zealand and Australian dollars, with others in South America and Europe possibly joining as well.

He fears that while the short-term effects could be positive for those countries involved as well as the risk assets associated with such moves, the long-term consequences could be onerous.

"These policies are creating the preconditions for central banks around the world in, say, five to 10 years from now to ask, 'How do we shrink these balance sheets in an organized and gradual manner?'" de Longis said. "History tells us that these large experiments, especially on a global scale, don't end up being unwound in an orderly manner."

The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.

The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.

Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.

The skirmish may lead to a clash of G-20 finance ministers and central banks when they meet next month in Moscow, three months after reiterating their 2009 pledge to “refrain from competitive devaluation of currencies.”

While emerging markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, the engagement of richer nations is adding a new dimension to what Brazilian Finance Minister Guido Mantega first dubbed a currency war in 2010.

After Switzerland blocked the franc’s appreciation against the euro since September 2011, Japan has reignited the latest round of rhetoric as newly elected Prime Minister Shinzo Abe campaigns to spur growth via a more aggressive central bank. The yen has slid 11 percent against the dollar since December and this week touched its lowest level in two years.

Now other policy makers are speaking out. Juncker, who leads the group of euro-area finance ministers, said yesterday that the euro’s 7 percent gain against the dollar in the past six months poses a fresh threat to the European economy just as it shows signs of escaping its three-year debt crisis.

While the euro fell, the power of his words may be limited by signals from the European Central Bank that it isn’t prepared to favor a weaker currency. ECB President Mario Draghi last week said he has no goal for the exchange rate, although he noted the euro was trading at its long-run average.

The euro exchange rate is “not a major concern,” ECB council member Ewald Nowotny told reporters in Vienna today.

“For us, the exchange rate of the euro is one variable to be factored in, but isn’t a goal in itself,” ECB Executive Board member Peter Praet told La Libre Belgique newspaper in an interview published today.

Still, economists at Goldman Sachs Group Inc. and Citigroup Inc. said in reports today that a further strengthening of the euro could eventually help trigger an interest-rate cut from the ECB.

In Norway, Finance Minister Sigbjoern Johnsen said in an interview that a strong krone challenges the economy and that the government must ease pressure on the Norges Bank to avoid krone strengthening by conducting a “tight” fiscal policy. Norges Bank Deputy Governor Jan F. Qvigstad said yesterday that if the krone remains strong until policy makers meet in March, “that of course has an obvious effect on the interest rate.”

That pushed the currency, which has emerged as a haven from the European crisis, to its lowest level in more than two months versus the euro.

Meantime, Riksbank Deputy Governor Lars E. O. Svensson said today that a strong Swedish krona would be “yet another reason” to lower borrowing costs. He last month argued for a deeper cut than the 0.25 percentage point move to 1 percent that colleagues supported.

“It’s obvious that the economy would manage better in this very difficult, weak economy with a lower rate and a weaker krona,” Svensson said in Stockholm.

Elsewhere, Bank of Korea Governor Kim Choong Soo said Jan. 14 that a steep drop in the yen could provoke an “active response to minimize any negative impacts on exports and investor confidence.” Vice Finance Minister Shin Je Yoon said today that South Korea wants the G-20 talks in Moscow to focus on adverse effects of monetary easing in the U.S., Europe and Japan.

If Japan continues to pursue a softer currency, reciprocal devaluations would hurt the global economy, Russia’s Ulyukayev said today. That echoes recent concern from other international policy chiefs.

Federal Reserve Bank of St. Louis President James Bullard said Jan. 10 that he’s “a little disturbed” by Japan’s stance and the risk of “beggar-thy-neighbor” policies.

Reserve Bank of Australia Governor Glenn Stevens said Dec. 12 that there is a “degree of disquiet in the global policy- making community,” while Bank of England Governor Mervyn King said Dec. 10 that he worried “we’ll see the growth of actively managed exchange rates.”

...my point is that there is a level and speed where a falling Yen becomes very damaging. If cost-push inflation happens. I'm not sure pricing power among the aging Japanese population is that strong.... The ratio trend is still up (on the EWJ) but I think the trade is too one-sided. No one talking about negatives. 

As you will learn in tomorrow’s paper, the fourth quarter of 2012 was a good time for private equity investing in the Dallas-Fort Worth area.

My big question is, what will 2013 look like? For answers, I chatted with Jay Turner, a principal in the Dallas office of Dos Rios Partners, a private equity firm in formation with locations in Houston and Austin.

Things are shaping up to be “very attractive for a robust deal environment in the next 12 to 24 months,” Turner said.

He argues that three factors are combining to push up private equity activity.

For one thing, low interest rates makedebt financing inexpensive, Turner said. “This is a good time to deploy and borrow capital.”

There is also pent-up demand from Baby Boomers who need to cashin at least some of their chips on the businesses they own, Turner said.

Many people from that generation delayed selling their companies over the past few years because they would have fetched low prices. But with their golden years looming, they need to get some cash in their pockets, and thus could turn to private equity to make that happen.

In the same vein, private equity funds raised over the past few years are running out of contractually-mandated time to investthe money their limited partners have committed. Being in an invest-it-or-lose-the-commitments situation, private equity firms are therefore writing checks, Turner said.

Silver Lake, in its quest to put together what would be the largest buyout since the global financial crisis, has reached out to the $170 billion Canada Pension Plan Investment Board and other investors in its fund, known as limited partners, the people said.

Thus far, Singapore's state investor Temasek Holdings Pte Ltd -- another prospective equity partner that Silver Lake has tapped -- is not interested in joining the consortium, the people said.

While Silver Lake has yet to line up investment partners, the buyout firm has told its bank lenders that it remains very confident about its ability to secure equity financing, two of the sources said.

Founder and CEO Mike Dell remains a linchpin of the effort. The man who grew Dell from a college dorm-room hobby into the world's No. 3 PC maker is sitting on an estimated personal fortune of $14.6 billion, according to Forbes.

It is unclear how much the billionaire will contribute to the buyout, or how much of his 14 percent stake in Dell will be rolled into the deal, the sources said.

One of the two sources said Silver Lake did not need to line up firm commitments from equity partners like CPPIB ahead of time, because those could be secured after a deal structure is devised and put in place.

"It is not pinned down as to what might be rolled and what might be new. The other equity partners don't have to show up with a signed commitment letter," the source said on condition of anonymity because the discussions are not public.

"It is not around the equity. There is a very fluid situation now."

A Temasek spokesman declined to comment on market speculation. A spokesman for the CPPIB declined to comment. Silver Lake could not be immediately reached for comment. Dell declined to comment.

Silver Lake is a known quantity to Dell or its top executives. Michael Dell was an early investor in their funds while board member Alex Mandl has also worked with the firm in the past.

Dell's software chief, John Swainson, who joined last March, was a senior advisor at Silver Lake.

SETTING SUN

One of the sources aware of Temasek's strategy said a company like Dell does not fit into its investment themes, which include "emerging champions" and "growing middle-income populations."

"It's not happening," another source told Reuters on Thursday, responding to media reports that Temasek is one of the prospective investment partners talking to Silver Lake about joining the consortium.

Wall Street analysts without direct knowledge of the deal discussions have cast doubt on the wisdom of investing in a stagnant PC industry rapidly getting eclipsed by a growing preference for mobile connected devices, like tablets.

In the PC market itself, Dell has steadily ceded market share to nimbler rivals such as Lenovo Group and is struggling to re-ignite growth. That's in spite of Michael Dell's best efforts in the five years since he retook the helm of the company he founded in 1984, following a brief hiatus during which its fortunes waned rapidly.

Silver Lake is having markedly more success on other aspects of the deal. It has tapped Credit Suisse, Bank of America Merrill Lynch, Barclays and RBC to finance a potential deal, sources have previously told Reuters.

A potential buyout of Dell -- a $19 billion company -- would allow Dell, which has been trying to become a one-stop shop for corporate technology needs as the PC market shrinks, to conduct that difficult makeover away from public scrutiny.

Dell, which has been in talks with private equity firms on a potential buyout, has had on-and-off discussions with the firms but talks heated up late last year, sources have said.

Hotel real estate investors, who unlocked capital and aggressively bid on hotel assets in 2012, are expected to increase their buying activity in 2013.The abundance of equity capital and improving debt markets will support a buoyant market for hotel trades this year. Americas hotel transaction volume for the year is expected to surpass the $17.5 billion that 2012 netted, with a moderate increase to $18.5 billion[i], according to initial results from Jones Lang LaSalle's annual Hotel Investment Outlook report.

The Hotel Investment Outlook report is a forward-looking, global analysis which tracks key factors affecting the hotel investment market. The Americas highlights include:

Competition for high-quality assets will push up capital values and drive down yields

Strong re-emergence of hotel financing will be driven by CMBS: Private equity funds to be the largest net buyers of hotels in 2013

"We expect 2013 to be another strong year for hotel transactions," said Arthur Adler, Americas CEO of Jones Lang LaSalle's Hotels & Hospitality Group. "The United States remains the world's most liquid hotel investment market which will lead the Americas region to transact approximately 55 percent of the global transaction volume. We should see global volumes top $32 billion this year."

Urban Land Institute's Emerging Trends in Real Estate 2013 report agrees that this year will continue to gain transaction velocity, noting "transaction volume should finally gain momentum as buyers capitulate in the face of strong revenue growth and lenders dispose of more foreclosed assets."

The Propellers of Debt Liquidity

A strong re-emergence of hotel financing driven by CMBS will propel debt liquidity to its highest level since 2007. CMBS lenders will continue to drive pricing, terms and accessibility. Balance sheet lenders are more selective with regard to asset quality, market and sponsorship, but will continue to provide floating rate structures that are favored by hotel owners. It's expected that hotels will remain a targeted asset class for lenders as they offer high yields, relative to other real estate and fixed income classes, relative to the risk.

"The unpaid balance of hotel CMBS loans with initial maturity dates through 2013 totals nearly $19 billion[iii]. Lenders, and in particular subordinate lenders, have shown an increased willingness to foreclose or exercise other rights and remedies, including note sales. Consequently, 2013 could very well mark the beginning of the long-awaited 'great deleveraging' particularly for hotel assets," added Mathew Comfort, Executive Vice President of Jones Lang LaSalle.

Canada's $120 billion Ontario Teachers' Pension Plan is looking at stepping up its investments in Australia with a minimum project target of $250 million.

Its interest comes as US and other Canadian pension funds have been increasing their investments in Australian property and infrastructure assets, with growing interest in potential privatisations of state-owned assets.

In an exclusive interview with The Australian, the Ontario fund's senior vice-president in charge of global infrastructure, Stephen Dowd, said Australia was a "really great market to invest in".

"We are a global investor and we look to numerous markets across the world, but we do find Australia is one of the attractive ones that we want to pay attention to," Mr Dowd said.

"Australia is open to foreign direct investment. There is a well-established regulatory regime, a very open business environment and a fundamentally healthy economy.

"We hope to find some good investments there."

The Canadian fund boosted its exposure in Australia last year to $1bn with a stake in a long-term lease of the Sydney desalination plant from the NSW government as part of a consortium with Hastings.

Mr Dowd would not comment on reports the Toronto-based fund is teaming up with the Westpac-owned Hastings Funds Management to bid for two ports being sold by the NSW government, the Port of Botany and Port Kembla -- a deal estimated to be worth as much as $3bn.

Mr Dowd said the Ontario Teachers' fund had a "good relationship with Hastings".

"We have known them for a long time. We feel they are very aligned partners and we are happy that we invested with them in the desalination plant," he said.

Mr Dowd said his fund also had an "open dialogue" with the federal government-owned $80bn Future Fund and Industry Funds Management, a $37bn fund owned by industry superannuation funds in Australia, but it had yet to do any deals with them.

He said the Ontario fund generally looked to put in a minimum of about $250m into infrastructure investments and was looking for investments it would hold for the long term.

Canada's largest pension fund, the $170bn Canadian Pension Plan Investment Board, which last year agreed to invest $1bn in the Barangaroo project on Sydney Harbour with Lend Lease, is also believed to have teamed up with the Macquarie group in another consortium to bid for the two NSW ports.

The Alberta Investment Management Corporation, which spent $415m buying Great Southern Plantations in early 2011, is also believed to be looking at joining a consortium, and there are reports another Canadian fund, Borealis, could also be interested.

The successful bidder is expected to be announced as early as April, with due diligence now under way.

"We continue to see strong interest from Canadian pension funds, both in our real estate and infrastructure assets," Andrew Cannane, the head of business development and corporate client relationships for The Trust Company, said yesterday.

"They like the relative strength of the Australian economy as against others, and the fact that we have sufficient integrity in our structural infrastructure to ensure commercial opportunities get done and with legal predictability," he said.

Mr Cannane said the Australian dollar may have increased against the US dollar in recent years but the Canadian dollar has also been strong, which made the strong Australian dollar less of an issue for Canadian investors here.

He said some of the big Canadian funds also felt more comfortable investing in Australian infrastructure than in Chinese.

"I have heard the anecdote that a Canadian pension fund would prefer to invest in an Australian port servicing China, than a China port," he said.

Mr Cannane said Canadian funds were still interested in prime property in Australia.

But he said there was a shortage of quality infrastructure deals, which was why there was such strong competition for deals such as the two NSW ports.

"There is strong competition for the quality assets that do come up," he said. "They would love 10 NSW port deals.

"If there were more infrastructure to invest in here there would be even more capital flowing."

Canada's second-largest pension fund, the $160bn Caisse de Depot from Quebec, made its first investment in Australia last year, pouring some $139m into taking a stake in the Melbourne Convention Centre and other assets owned by the Plenary Convention group.

The Quebec fund followed up in November last year with a $40m investment in the Victorian Comprehensive Cancer Centre Project.

The second-largest pension fund in the US, the $150bn California State Teachers Retirement System, last year gave the Melbourne-based Industry Funds Management group a $500m mandate to invest in infrastructure in Australia and overseas.

Mr Dowd said the Ontario fund was interested in investing in assets such as ports and electricity companies but would not say whether it would be bidding for any other ports up for sale in Australia or the electricity assets for sale in NSW. "Both sectors are of interest to us and we evaluate opportunities like that around the world all the time," he said.

In 2007, Mr Dowd led a $US2.4bn deal to buy four container terminals in North America for the fund.

Mr Dowd said the Ontario Teachers' fund also had other investments in Australia, including shares, but did not provide details.

The fund's website shows that it had a $122m investment in Rio Tinto and $109m investment in shares in News Corporation, the publisher of The Australian, as of December 2011.

Mr Dowd said the Ontario fund did not have any property investments in Australia but it had been looking at infrastructure investments in Australia for more than a decade.

He said it had made some unsuccessful bids for infrastructure assets with the Hastings fund some years ago.

Canadian Pension Plan Investment Board and Ontario Teachers' fund both bought stakes in toll road operator Transurban some years ago and made bids for the company in 2009 and 2010.

Both funds later sold out of the company.

Mr Dowd said the Ontario fund, which had built up a 13 per cent stake in Transurban before it sold out, had learned some lessons from its unsuccessful bids for the company.

"We learn lessons from everything we do, whether we are successful or not, and we try to apply them to the next deal we do," Mr Dowd said.

"In that case we were unsuccessful because the board did not like our value. One of the lessons to learn for us (from that deal) is that it is important for us to stick to the analysis we have done and the value we have come to.

"If we are not successful, we are not successful and we move on."

The Ontario fund also had an 11 per cent stake in Sydney Airport with the Macquarie group that it exchanged for stakes in Brussels Airport and Copenhagen Airport in 2011. The fund plans to set up an office in Hong Kong later this year to expand its investments in Asia.

"As a global investor we think it is very important to be in contact with important markets," Mr Dowd said. "Asia is more and more important to us as a market to invest in."

Mr Dowd said the fund was looking for "hard assets with positions which are protected from market competition". He said: "We are looking for stable, cashflow-generating assets."

No overall value on the deal was disclosed by Teachers, but it said SeaCube (NYSE:BOX) shareholders will receive $23 in cash per common share. The company has just under 20.3 million shares.

The offer represents a 13.3 per cent premium over SeaCube's Friday's closing price and a 25 per cent premium over its 50-day volume-weighted average price. It is also a 130 per cent premium over the issue's initial public offering price in October 2010, Teachers said.

The transaction has been unanimously approved by the board of directors of SeaCube and is expected to close in the first half of 2013, subject various regulatory and shareholder approvals.

Park Ridge, N.J.,-based SeaCube has seven offices worldwide and owns, manages and leases containers for the global containerized cargo trade. The equipment is primarily leased under long-term contracts to the world's largest shipping lines.

"SeaCube is a good fit with our investment criteria of providing reliable income streams, consistent performance and growth opportunities," said Lee Sienna, vice-president, long-term equities at Teachers.

With $117.1 billion in assets as of Dec. 31, the Ontario Teachers' Pension Plan is the largest single-profession pension plan in Canada. It invests the pension fund's assets and administers the pensions of 300,000 active and retired teachers in Ontario.

If trade routes are the global economy’s circulatory system, the port of Long Beach is one of the valves. Last year the port processed 6m containers, making it America’s second-busiest (neighbouring Los Angeles is number one). Nearly 5,000 vessels visited Long Beach in 2012. Their scale is vast. The OOCL Asia, a container ship observed recently by your correspondent, resembles a floating car park. It has a capacity of 8,000 twenty-foot-equivalent units (TEUs); vessels that can carry almost three times as much may be on the way.

Trucks line up at the port entrance, gleaming in the Californian sun: the grubby fleet of yesteryear has largely been retired by environmental rules. The containers are unloaded, stacked and eventually picked up for distribution across America—by train if the destination is over 600 miles (966km) away, otherwise by truck. After the trucks pass through a mandatory check for radioactivity, many of them will head to warehouses in the Inland Empire, the urban sprawl east of Los Angeles.

Ports like Long Beach cannot tell the whole story of world trade. Although up to 90% of trade by volume is seaborne, low-value “dry bulk”, like the scrap metal piled up at one Long Beach terminal, accounts for about half of it. Small, valuable stuff often goes by air. According to Jock O’Connell at Beacon Economics, a consultancy, the average value of a kilo of containerised cargo arriving at Los Angeles/Long Beach ports in the first 11 months of 2012 was $6.34; at LAX airport it was $102.78.

But Long Beach still offers a prism on the global economy, and on US trade in particular. For one thing, the airborne share of trade is declining as the efficiency of seaborne trade grows. Los Angeles and Long Beach are spending over $5 billion between them on infrastructure to cope with ever-larger ships. Long Beach is building Middle Harbour, a 321-acre (130-hectare) container terminal that will be able to receive vessels of up to 18,000 TEUs. This month construction began on a replacement for the Gerald Desmond bridge, which will allow larger vessels to penetrate deeper into the harbour.

The routes plied by these ships provide clues to the strength of the world’s big economies. Throughout the 1990s and 2000s Los Angeles and Long Beach ports benefited as Asian countries, particularly China, were integrated into the global trading system (see charts). Container traffic at Long Beach has more than doubled since 1995. Trade volumes slumped dramatically in 2008-09, and activity has yet to regain its pre-crisis peak. But the outlook is strong: a 2009 report predicted a doubling of container traffic at Los Angeles/Long Beach by 2030. A proposed Pacific free-trade agreement could boost maritime trade further; Europe’s doldrums have already seen ships redeployed to transpacific routes.

The cargoes that fill the ships at America’s ports reflect changes in US consumption patterns (eg, fewer oil imports as domestic production increases). They also illuminate rising wealth abroad: last year the value of agricultural products exported from west-coast ports exceeded that of recyclable materials for the first time, thanks in part to Asia’s growing taste for meat.

And the proportion of containers that leave the terminals empty after having arrived full tells a story about America’s persistent trade deficit. Last year at Long Beach it was about half. This proportion may well shrink. In 2010 Barack Obama called for a doubling of American exports within five years. That goal is starting to look too ambitious, but the export sector has been outpacing the economy: in the 12 months to September 2012 American exports of goods and services were worth over $2.1 trillion, 38% more than in 2009.

A big boost could come from the export, in liquefied form, of the natural gas opened up by America’s shale boom. The Department of Energy must approve all LNG exports, and licences for most countries are hard to obtain. But producers are hungry to take advantage of higher prices abroad. Asia currently accounts for almost two-thirds of global LNG imports. This leaves Pacific states like California well placed to take advantage, should politicians adopt a more relaxed attitude.

Other developments may not help the west coast. The much-heralded expansion of the Panama Canal, now postponed until April 2015, will make room for vessels with a capacity of up to 13,000 TEUs (only tiddlers below 4,400 TEUs are now allowed). Over time that could mean a shift of business away from Long Beach to east-coast and Gulf of Mexico ports, though how much will partly depend on the canal’s fees and the capacity of these ports.

Anthony Otto, president of Long Beach Container Terminal, does not sound too concerned. Last year LBCT’s Hong Kong-based parent company placed a big bet on Long Beach’s future by taking out a 40-year, $4.6 billion lease at Middle Harbour. The transit times, facilities and cost structure at Long Beach, says Mr Otto, will ensure it stays the “preferred gateway” to American consumers for many shippers.

But some things the port can do little about. One is the growth of non-traditional trade routes (see article). The China-Brazil connection is increasingly vital. Pascal Lamy, head of the World Trade Organisation, has suggested that Africa could be China’s biggest trade partner within three to five years. Another challenge is “nearshoring”, the shift of manufacturing capacity closer to American consumers (see our special report). Mexico has been the big winner here: since 2010 it has outpaced China in increasing its exports to America. Most goods travel over land: fine news for truckers and trains, less so for ports.

The current bull market on Wall Street has one thing in common with late comedian Rodney Dangerfield: It don't get no respect!

Numbers don't lie. The Standard and Poor's 500, an index of large-company U.S. stocks, eked out a fresh five-year high Thursday at 1480.94. It is up 119% since the bull market began on March 9, 2009, which means it is a member of the so-called "100% Gain Club," and just one of nine bull markets in the benchmark index's history to post a triple-digit gain, according to Bespoke Investment Group.

The current bull, which followed the worst bear market, or market plunge, since the Great Depression, is also 1,407 days old, which ranks eighth and also puts it in the "1,000 Day Club."

In cash terms, the stock market has generated $10.5 trillion in paper wealth since the bear market ended, according to Wilshire Associates.

So why is this historically significant market advance, which has enabled the S&P 500 to climb within 6% of its Oct. 9, 2007, all-time high of 1565.15, so despised? So disrespected? So distrusted?

"It is the Rodney Dangerfield of bull markets," says Gene Needles, CEO of American Beacon Funds. He says most investors don't know how strong the market is because they have focused on short-term volatility. "They think the market is down. They've been reading all of the dire headlines. The financial crisis. Fiscal cliff. Debt-ceiling debate. Europe. Pick your poison. It hasn't felt like a bull market. It's not like in the 1990s when there was a ticker-tape-parade-type atmosphere every day on Wall Street."

The stellar statistics, of course, tell a story of success, not failure. But, oddly, investors, especially ones on Main Street, don't seem to care. For much of the last 44 months, most investors, many of them psychologically and financially scarred by the 2008-09 financial crisis, have sworn off the stock market.

Instead, in search of perceived safety and a good night's sleep, they have plowed the bulk of their life savings into bonds or deposited their cash in banks that pay about the same zero interest rate as the mattress-turned-piggy-bank that gained acclaim after the 1929 stock market crash.

In the five years ended in 2012, individual investors have yanked an estimated $557 billion out of U.S. stock mutual funds, while $1 trillion has been funneled into bond funds, according to data from the Investment Company Institute, a fund company trade group.

It's as if investors can't forgive the market for burning them badly in the rout a few years ago; a plunge that was less than a decade removed from the tech-stock-inspired crash in 2000. Like a spurned lover, investors have been unwilling to give the stock market a second chance, or even a third chance.

"Investors don't really trust the market itself, so they don't trust the rally," says Paul Hickey, co-founder of Bespoke Investment Group.

Despite the lingering pessimistic sentiment, the fact that the stock market keeps rising ever closer to its old all-time high in the face of bad news is a positive sign, counters Needles.

"It's more of a sign of a market breakout than a top," Needles says. "Investors have a renewed appetite for risk."

There are other theories as to why stocks have lost their luster as the go-to investment to get rich, save for college and fund a retirement nest egg.

Andres Garcia-Amaya, a global markets strategist at JPMorgan Funds who happens to think the current stock market rally has a ways to go, blames investor complacency. The bond market has been in a bull market for three decades, and investors scared off by the volatility of stocks, he says, found comfort in the solid and competitive performance of bonds vs. stocks over the years, especially the big outperformance during and after the 2008 financial crisis.

Another big factor causing investors' aversion to stocks to grow in recent years is that they have been unable to shake the bad memories of past stock market plunges, says Doug Sandler, chief equity officer at RiverFront Investment Group.

"We have been conditioned over the past 12 years into thinking that buying stocks is a bad decision, because they always get beat up at some point," Sandler says.

Adds Bespoke's Hickey: "With two 50% haircuts in the last 12 years, investors think it is just a matter of time before we get the next 50% drop. So they have just given up."

The other thing that has given investors pause, Sandler adds, is the fact that the market rally since 2009 has been driven in large part by policies and actions of lawmakers in Congress and central bankers, such as the Federal Reserve and European Central Bank. Some Wall Street bears argue that the gains have been artificially inflated by the stimulus injected into markets by bankers. These drastic and unprecedented measures used by central bankers to reignite the economy, revive risk taking and boost investor confidence are akin to "steroids" or "sugar high," critics say.

What's more, having politicians and bankers determine the fate of markets makes it hard to handicap the future.

"That stuff is really hard to forecast," says Sandler. "I can't tell you what (ECB head) Mario Draghi is thinking right now. We can guess. But it is different than trying to figure out how Apple's iPhone is selling. And that scares people."

But that doesn't mean that there is not a case to be made for stocks.

Ironically, while the irrational exuberance of the go-go 1990s, or even the heady days of the real estate boom in the mid-2000s, is long gone, the market, at least by common measures used by Wall Street to measure its vital signs, is in far better shape today and it points to more gains ahead, Sandler argues. Back in late 1999 and early 2000, when tech stocks were king and nearing a pre-crash peak, the S&P 500 was trading at more than 30 times its estimated earnings.

Today the market is trading at just 13 times estimated profits for 2013, which is below the long-term average of 15 times earnings. The market's current price-to-earnings multiple is even lower than it was at the stock market's last peak in October 2007, Sandler says. Corporate earnings, which slowed sharply in the second half of 2012, are expected to re-accelerate and grow roughly 10.6% this year, according to current analyst estimates tracked by Thomson Reuters.

So the stock market is not wildly overvalued and screaming that a top is near.

"Are we bumping up against super-high valuations? The answer is no," says Sandler, adding that the market is reasonably priced.

Not only are stocks not overvalued, they also look attractive relative to bonds, which currently are trading at, or near, record-high prices and sporting historically low yields that make it tough for investors to grow their money and build enough wealth to meet their long-term goals, says Garcia-Amaya. The yield on the benchmark 10-year Treasury bond is 1.83%. In contrast, stocks in the S&P 500 that pay dividends have an average yield of 2.8%, says S&P Dow Jones Indices.

"Relative to fixed-income, stocks look favorable," says Garcia-Amaya.

The broader economy is also performing better, albeit at a sub-par pace. The real estate recovery is also gaining speed and appears to be on a sustainable path. And, despite a still-high unemployment rate of 7.8%, the job market seems to be firming up. All of these developments are supportive of stocks. Low bond yields and tepid inflation also bode well for stocks.

Of course, there is still no shortage of things for jittery investors to worry about. While the nation narrowly missed falling off the fiscal cliff at the start of 2013, investors are now confronted with another contentious fight in Washington over raising the debt ceiling and ways to cut the deficit. The World Bank warned Tuesday that the U.S. budget battle is already restraining economic growth around the world and warned the U.S. could fall back into recession if massive budget cuts aren't avoided in coming months.

In short, fiscal risks still abound. Moody's, a ratings agency that evaluates the financial health of sovereign nations, including the U.S., warned this week that it will downgrade the nation's triple-A credit rating if Congress doesn't raise the debt ceiling and defaults on its debts. A similar move by S&P in the summer of 2011 after a similar battle resulted in the Dow tumbling 635 points in a single day.

Still, there are signs that individual investors' distaste for stocks might be waning, as the market nears its old peak and bonds start to show signs of weakness.

In its latest reading on fund flows, Lipper reported last Thursday that stock funds, including mutual funds and exchange traded funds that invest in both U.S. and foreign shares, took in a whopping $18.3 billion in the week ended Jan. 9, the fourth-largest weekly inflow since it began tracking them in January 1992. American Beacon Funds have been the recipient of some of those big recent inflows, Needles says. "Investors," he says, "are finally coming to the realization that the conservative investments they have been in have returned little to nothing over the past several months and years. That has left them in a deep hole."

While some pundits warn that Main Street investors returning to stocks in year four of the bull is a sign of a market top, many other Wall Street pros say it is a bullish signal, as it shows that there is fresh money coming in from the sidelines. It also suggests that investor confidence is rising and they are willing to take more risk. If there ever was a big catalyst for the stock market, it would be individual investors returning to stocks and shifting the mountain of cash now on the sidelines or parked in bond funds and back into risk assets. If the long-awaited asset shift from bonds to stocks occurs, the move is likely in its early innings.

"Net net, it's certainly a bullish backdrop for the market," says Bespoke's Hickey. "With low levels of investor participation now, there is a lot of convincing left for the bull to do."

One of the UK’s fastest-growing hedge funds is slashing its fees, in a move that it hopes will spark a rethink of the industry’s notoriously high charges.

The new Core Macro fund being set up by Cambridge-based Cantab Capital will employ similar trading strategies as funds from Man Group, Winton Capital and BlueCrest, three of the world’s biggest hedge funds that manage $100bn between them, but at half the cost to investors.

While the industry standard is an eye-watering “two and 20”, or 2 per cent of all capital invested annually and 20 per cent of all profits, Cantab’s new fund levies only 0.5 per cent and 10 per cent.

Fees are set to become one of the hedge fund industry’s biggest areas of change as large institutional investors try to use their clout to force discounts in a tough trading environment that has dented hedge funds’ once-high returns.

“We are seeing a substantial increase in institutional allocators investing directly in hedge funds and they are typically the most fee-sensitive,” said Daniel Caplan, European head of global prime finance at Deutsche Bank. “A key focus is not paying for returns that are purely correlated to market moves – investors can access that more cost-effectively elsewhere.”

Many hedge funds continue staunchly to resist lowering charges, argue that lower fees equate to lower quality. Man Group, Winton Capital and BlueCrest declined to comment.

Cantab’s new fund, and those from the other three, belong to a class of quantitative funds called trend followers, which use computer algorithms to spot and trade on trends across different markets, and collectively manage around $330bn in assets, according to BarclayHedge.

Ewan Kirk, Cantab’s founder, believes investors are being overcharged by many big quant funds. The trading strategies they provide can be delivered for lower costs, he said: “This is potentially a game changer,” the ex-astrophysicist told the Financial Times. “It’s like when Vanguard came out with the first index trackers.”

Established large trend following funds point out that they invest considerably in constantly refining and tweaking their models to stay ahead of new competitors and ensure investors get what they pay for.

Cantab’s new fund has capacity to manage up to $25bn based on its current trading models, Mr Kirk said. Cantab manages an existing $4.5bn quant fund, which it will continue to charge standard fees for. It capped its size last year because it believes increasing its assets will stymie performance.

Mr Kirk believes investors are being overcharged by many big quant funds. The trading strategies they provide can be delivered for far lower costs, he says.

The biggest quant funds have reduced their ability to deliver big returns as they have swelled dramatically in size in recent years, he adds, but they have not reduced their fees.

Cantab’s new fund’s easy scalability makes it a significant threat to rivals and although Cantab has yet to begin marketing the fund, details of its low charges have already led to disquiet.

The fund made 15.3 per cent last year compared with an average loss of 2.6 per cent for other trend followers, according to Hedge Fund Research. The average hedge fund made 6.2 per cent.

The Newedge CTA Trend Sub-Index, which tracks the performance of the largest computer-driven, or quant funds, fell 3.4 percent last year after a 7.9 percent decline in 2011. David Harding’s $10 billion Winton Futures Fund Ltd. slid 3.5 percent in 2012, its second annual decline since opening in 1997, investors in the pool said. Man Group Plc (EMG)’s $17 billion AHL Diversified fund fell 2.1 percent, while BlueCrest Capital Management’s $14 billion trend-following fund gained 0.02 percent, said the investors, who asked not to be identified because the figures are private.

The performance of the funds belies their popularity with investors, who’ve poured $108.2 billion into the pools since the end of 2008, according to Fairfield, Iowa-based BarclayHedge Ltd. While quants made money during the financial crisis when other hedge funds didn’t, they’ve since stumbled as market sentiment swung from optimism to pessimism following political announcements in Washington and Brussels, breaking up the trends they try to follow. That may force investors to withdraw money.

“In 2008, we had very nice returns, and it was a pleasure being invested,” said Gabriel Garcin, a portfolio manager at Europanel Research and Alternative Asset Management in Paris. “Since then, it’s been a complete disaster” for trend- following hedge funds, he said.

Continuum Investment Management expects to launch its maiden hedge fund on February 1 with close to $100 million in assets, including $85 million in seed capital from fund of hedge funds manager Grosvenor Capital Management.

The fund will take a multi-strategy approach to investing in structured credit markets, focusing on pre-payment and credit-centric trades in residential and commercial mortgage-backed securities (RMBS and CMBS) and other asset-backed securities.

Continuum is led by Kevin Scherer, a former managing director and senior portfolio manager at Citadel. From 2008 to 2011, Scherer managed Citadel's Single Investor Fund, which primarily invested in agency and non-agency RMBS. Prior to Citadel, Scherer spent 8 years at Midway Group, a mortgage-focused hedge fund he co-founded in 2000.

Continuum's management team includes three of Scherer's former colleagues at Citadel: senior portfolio manager Brian McDonald, chief technology officer Jimmy Rizos and head of research and development Stephen Cameron. Chief operating officer Greg Scarffe joins from Credit Suisse, where he was a prime brokerage executive.

Funds investing in structured credit assets returned 16.72% on average in 2012, making them by far the best performing sector of the hedge fund industry, according to data from Hedge Fund Research. Structured credit strategies are widely tipped to outperform again in 2013, though some investors have expressed concerns that certain traded may be overcrowded.

Scherer says he is "very constructive" on structured credit markets. "There was a tremendous beta trade [in 2012], but now you have to proactively manage your risk and be able to do deep fundamental analysis, understand the collateral and structure of these bonds and have a lot of trading acumen to realise attractive returns," he says.

He says Continuum's portfolio will be tilted towards pre-payment themes in agency RMBs in the short-term.

Continuum is looking to raise $250 million to $500 million for the fund in the next three to six months, according to Scherer.

After years of favoring fixed income, investors are ready to put their money back into equities and they might be rewarded with strong returns, especially in U.S. stocks, hedge fund managers and investors said at a conference on Tuesday.

"We have seen outflows from government bonds and the next big migration is going to be into equities," said Tim Garry, a portfolio manager at $3.7 billion Passport Capital.

This shift, the first since the 2008 financial crisis, could come as welcome news for thousands of hedge fund managers who specialize in stocks.

Debating exactly where strong returns might come from after a largely lackluster year for hedge funds was the key topic at the GAIM USA 2013 conference in Florida.

"There has been lots of money flowing into credit strategies, but I also think there are more returns to be made in equities," said Patrick Wolff, whose $120 million Grandmaster Capital Management gained 22 percent last year.

Wolff has a particular taste for U.S. stocks, noting the shares he expects to do best are from companies in regions that will not suffer big economic traumas.

"I'm a big proponent of Fortress America," he said, noting that conditions now appear ripe for stronger growth in the United States.

Even as many managers still believe that growth will come from countries such as China, Wolff declares himself a China bear who is worried the bubble of fast growth is ready to burst.

"I like to own businesses that are not exposed to this big risk factor," he said.

Hedge fund managers paid as much as $4,000 to attend one of the year's first industry conferences and mingle with investors on the manicured lawns at the Boca Raton Resort & Club at a time when pension funds, endowments and wealthy investors are eager to put new money to work.

But as a group, the industry has a lot to prove and explain after returning only 6 percent last year, far less than the Standard & Poor's 500 index' 13 percent.

The GAIM conference is the first of a handful of industry get-togethers this month that includes next week's Morgan Stanley Breakers conference, where some of the industry biggest stars converge in Palm Beach, Florida.

Steven Cohen, whose $14 billion SAC Capital Advisors is currently embroiled in the government's insider trading investigation, will be one of the big names flying to Florida. He is offering investors a chance to dine or golf with him, a person familiar with the conference said.

Cohen has been a sporadic guest at the Breakers conference in the last years and will appear this year only weeks before his investors have to decide whether to stay put or pull money out of his fund.

A spokesman for SAC declined to comment.

At the GAIM conference managers ticked off their ideas with some being thousands of miles away. Marko Dimitrijevic, who founded $1.7 billion Everest Capital, likes homebuilders in India.

Mark Yusko, who invests $7 billion with hedge funds as chief investment officer at Morgan Creek Capital likes a manager "who is kicking the crap out of everyone else by owning precious metals."

And Kyle Bass, who runs $1.1 billion Hayman Capital Management again expressed his concerns about Japan.

Besides wanting to hear where the big money can be made, managers and investors also debated who would be able to deliver those returns now after small investors roundly trounced their bigger rivals last year.

Conventional wisdom has long held that smaller managers with less than $1 billion in assets beat out the bigger funds and that may well suit the managers here, who tend to be on the smaller side with less than $5 billion in assets.

But many investors were still not ready to make that leap.

"You will see over time that smaller funds will outperform, but the larger ones add more downside protection," said Henry Davis, managing director at Arden Asset Management, which invests $7 billion for pension funds and other clients with some of the world's biggest and most prominent hedge fund managers.

Because of their size the bigger funds can often have better risk controls, he noted.

Many investors held private meetings with managers, but in the end, the biggest names were not in Florida, but at their offices in New York, Stamford and London.

"People who deliver on their promises are making good inroads," Morgan Creek's Yusko said, adding however that "the trend of going with the big names still isn't over."

Stephen Gandel, Senior Editor at CNN Money reports, Why the world's biggest hedge fund missed big in 2012:

Here's what needs to be asked about giant hedge fund Bridgewater Associates and its founder Ray Dalio: Is this guy really worth $2 billion a year? That's roughly the amount investors paid his firm in management fees in 2012.

That question got a lot tougher in the past 12 months for pension fund managers around the country, who for the past decade and a half have been funneling cash to Dalio and his firm, which now manages $142 billion - making it the largest hedge fund in the U.S.

That's because Dalio had a lousy 2012. By some reports, he was down for most of the year. Blog ZeroHedge appears to have a copy of Bridgewater's most recent client letter, which details how it did in 2012. Dalio's flagship hedge fund, Pure Alpha, ended the year up just 0.8%. That was much worse than the market in 2012. Stocks, as measured by the S&P 500, were up 13%. Bonds were up just over 4%. Even the average mutual fund manager, who gets paid far less than Dalio, was up 0.9% in the fourth quarter alone, just slightly better than Bridgewater did all year. For the full year, stock mutual fund managers were up 14%, handily beating Dalio.

Of course, every investor has off years. And Dalio is certainly entitled to one. Even with last year's flub, he still has one of the best track records of any investor. Pure Alpha has been up an average of 14% a year since 1991. Fortune, back in 2009, was one of the first major publications to profile Dalio and his success. So you could almost shrug off the $2 billion for an off year, I guess. (In good years, Dalio's company gets much, much more. In 2011, when his flagship fund was up 20%, his firm took in around $6 billion in fees.)

But a close look at Dalio suggests 2012 could be more than an anomaly.

Dalio generally believes most people get diversification wrong. They hold 60% of their portfolio in stocks and the rest in bonds, or some similar split, and call it a day. Dalio says stocks have historically been far riskier than bonds, so if you truly want to diversify your portfolio you have to put far more money in bonds than stocks.

According to the Wall Street Journal, Dalio preaches what he calls risk parity to institutional investors around the country, and has gotten a number of large pension funds to lever up their portfolios and buy more bonds. And they're doing this at a time when everyone appears to be growing more and more worried that the bond market could be in a bubble.

That sounds scary, but that's not the real problem. Dalio is, after all, about diversification. And he has recently joined the chorus of people who are warning that the bond market is overvalued.

If bonds do drop, Dalio's bets on stocks in theory should balance that out. The real problem is bonds are no longer the safe bet they once were. Rick Rieder, who is chief investment office of fundamental fixed income portfolios at Blackrock (BLK), says 30-year bonds were actually more volatile than stocks last year.

So Dalio's real bet -- that bonds are less risky than stocks -- is what was really off in 2012, and with interest rates at all-time lows that looks likely to continue for some time.

This is a simplistic analysis. Dalio only really practices risk parity with a little less than half of the money he manages. It's called the All Weather fund, which actually did better than Pure Alpha in 2012. Pure Alpha, on the other hand, as you can see from the numbers from ZeroHedge makes dozens of bets on all types of investments. But here too you can see the shift. Among the biggest movers in its portfolio recently are investments in US and European bonds. Its stock market investments, by comparison, have been less volatile.

Most people believe Dalio's success was built on his great macro calls, a swashbuckler able to stay one step ahead of the global economy. But while Pure Alpha is not the fully diversified All Weather, its outsized returns have been driven by the same general Dalio investment thesis: That investors have traditionally taken on too much stock market risk, and need to spread their bets.

That's been the true key to Dalio's success. And during a time of falling interest rates, it has worked great. And it may continue to. But it's also just the type of talk - that something like levering up your portfolio is safe as long as you use that leverage to buy bonds - that always pops up, and gets taken as gospel, just as bubbles are about to burst.

Several risk-parity mutual funds in the United States attempt to earn higher returns by applying leverage to balance the volatility contributions of a variety of asset classes, including commodities, corporate bonds and currencies.

The theory and expectation is that leverage allows the funds to be more efficiently diversified without sacrificing returns; an unleveraged portfolio will have high risk-adjusted returns but low absolute returns -- the problem faced by the Permanent Portfolio. Why should this theory hold?

In an ideal world, it should not. Even in a less-than-ideal world, investors would observe the strategy's excess return and arbitrage it away. Is the risk-parity cat out of the bag? Maybe not. If your reaction upon hearing the word "leverage" is alarm, you are not alone. And this widespread revulsion may keep risk-parity profitable. Leverage is anathema to many investors, meaning a sizable class of investors resort to riskier assets to achieve their expected-return targets.

We are observing such a shift today: investors are shifting from bonds to dividend stocks to boost their yields, even though classical finance theory says that they should be borrowing money instead. The result of leverage aversion is that low-volatility asset classes offer higher risk-adjusted returns, which can be exploited by investors willing to use leverage -- that is, risk-parity investors.

Even if you don't fully trust these newfangled risk-parity strategies, it's still worthwhile to stress-test your portfolio to see how sensitive it is to all four economic scenarios.

The office's occupant isn't a high-flying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.

It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.

The $114bn Texas fund has hit the trend particularly hard. It now boasts some of the splashiest bets in the industry, having committed about $30bn to private equity, real estate and other so-called alternatives since early 2008. That makes it the biggest such investor among the 10 largest U.S. public pensions, according to data provider Preqin. Those funds have an average alternatives allocation of 21%.

Not all pension managers are in on the action. Some funds are wary of the high management fees often charged by private-equity and hedge-fund firms. And while a large fund like Texas' may have access to marquee investors, smaller pensions may have trouble getting an audience with the best performing firms.

Even in Texas, there isn't exactly consensus. Critics worry that the teachers' benefits are leaning too heavily on the esoteric investments, which can be less liquid and less transparent than stocks and bonds. Another sticking point is the fund's generous bonus culture—a contrast against the pensioners, who haven't seen a cost-of-living raise in more than a decade.

"I have problems with these alternatives," says former Texas State Sen. Steve Ogden, who owns an oil and gas company. "It's one of these 'trust me' investments."

And yet the strategy has helped to turbocharge the Texas pension, with returns from private equity averaging 4.8% and 15.6% over the past five-year and three-year periods respectively.

Including all assets, the pension's annual return from Dec. 31, 2007, to Dec. 31, 2012, was 3.1%—better than the median preliminary return of 2.46% among large public funds, according to Wilshire Trust Universe Comparison Service.

Texas pension officials say private equity helped offset declines in its other investments. Britt Harris, the pension's chief investment officer, says he aims to "smash" the stereotype that government pension funds are on the losing end of most investments.

In November 2011, the Texas fund made one of the largest single commitments in the private-equity industry's history, investing $3bn in KKR and another $3bn in Apollo Global Management. Three months later, Texas teachers bought a $250m stake in the world's biggest hedge-fund firm, Bridgewater Associates—a first such equity stake for a US public pension.

For the fiscal year ended Aug. 31, the Texas teachers fund had a 7.6% return, and pension officials say they expect their bet on alternatives can help the fund hit its 8% annual target return over the long term. Over a ten-year period ending Aug. 31, 2012, the fund has had an annual fiscal year return of 7.4%.

Other large pension funds aren't so optimistic. Sticking to a return of 8% or more is "taking a big risk with one's ability to pay for benefits,' says Richard Ravitch, co-chair of the State Budget Crisis Task Force, a nonpartisan research group. Since 2009, one-third of state pension plans have scaled back their return goals, according to the National Association of State Retirement Administrators.

The reason: In some states, like California, failure to hit the target return puts taxpayers on the line to make up the difference.

California's giant public employee pension fund, Calpers, had made an aggressive push into alternative investments such as real estate, representing about one-tenth of its assets. But many of those real-estate holdings, particularly in housing, suffered big losses during the financial crisis.

If Texas misses its mark, state officials could seek to cut benefits or switch newly hired teachers from traditional pensions to less generous 401(k)-type plans. Similar proposals in other states have met with stiff resistance from labour unions.

Retired education workers in Texas, on average, receive an annual pension of $21,730. Most former educators don't receive Social Security, making their total retirement benefits among the lowest of the big public pension systems.

"If new teachers are forced to switch to 401(k)s," says Tim Lee, head of the retired teachers association, "they will end up in poverty."

Unlike many state pensions, the Texas teachers fund is in relatively solid shape. It is 82% funded, meaning there are 82 cents of assets covering $1 of liabilities, up from a low of 68% in February 2009, during the depths of the financial crisis. The average funding level among large public pension systems nationally is about 76%. Contributions from teachers and the state are identical, at 6.4% of employee salaries. The balance comes from investment earnings.

Still, the pension had a $26 billion shortfall, as measured at the end of August, caused in large part by big stock market losses during the financial crisis and increases to benefits for future retirees.

Harris, the pension's CIO since late 2006, says over the long term the fund can keep hitting its target, but "getting to [the 8% target level] over the next five to 10 years is going to be tough," he acknowledges.

With so much riding on returns, Harris has created an investment operation that looks and feels more like a hedge fund than a government agency. The office lobby buzzes with a flat-screen television that hangs next to photos of school children. Two of the fund's traders work into the night from a windowless room, following the markets in Asia and Europe. Staff—including secretaries—can score annual bonuses provided the pension beats its peers by just a small fraction.

Mr. Harris, whose mother is a retired Texas schoolteacher, once managed pension investments for corporations like Verizon and briefly served as CEO of Bridgewater. Last year, he was rewarded by the fund with a bonus totalling $483,753. Harris recused himself from the pension's deal to buy the Bridgewater stake.

Fund officials say the bonuses are necessary to attract an investment staff that can compete with the most accomplished investors around the world.

For decades, the Teacher Retirement System favoured a mild brew of stocks and bonds. But starting in 2000, Gov. Rick Perry, a Republican, put real-estate developers and other investors on the pension system's board. Five of the nine current trustees are investment professionals.

"We had to have a more progressive system of investing if retirees were ever going to get a cost-of-living increase,' says Linus Wright, a former pension board member and former superintendent of the Dallas schools.

Between 2005 and 2007, as Texas and other states were ratcheting up their private-equity investments, state legislatures passed laws preventing certain information about the holdings from being disclosed to the public. Some private-equity firms insisted on these measures before approving investments from pension funds, says William Kelly, a partner at Nixon Peabody LLP, who works with both pensions and private-equity firms on disclosure issues.

"We are not your average investor,' said Steve LeBlanc, the former head of private-equity investments, who left the Texas pension fund in April to return to the private sector.

To help train managers, Harris employed some unusual tactics. He hired former law-enforcement agents to teach his staff how to tell if someone is being less than truthful when touting investments.

One strategy: Always have two members of the pension-fund staff in the room. That way, one person can listen to what the Wall Street salesperson is saying and the other can watch his or her body language.

"We know we are up against the most highly resourced, most sophisticated sales effort probably in the whole world,' says Harris. "But we have brought people in here who are equal to or better than what you find on Wall Street."

During the financial crisis, the Texas teachers fund showed its mettle by making investments that many pension funds couldn't stomach.

As the credit crisis escalated in late 2008, the Texas pension board authorised an investment of up to $5bn in inexpensive, high-yielding debt.

It was a large amount, even for a Texas-size fund. Still, some pension officials had an appetite for more. One pension board trustee said he was comfortable investing up to half of the pension fund's assets in the cheap debt, recalls board chairman David Kelly.

As the recession deepened and fear roiled the debt markets, the pension's investments in residential mortgages, corporate bonds and bank loans, totalling $2.6bn , lost value in the early part of 2009. The pension fund held on to the debt, which eventually gained 15%.

"Everyone, as we like to say down here, cowboyed up," says Kelly, a former Salomon Brothers banker and real-estate executive.

Ogden, the former legislator, had tried to convince lawmakers to reconsider the teachers' investment strategy. Instead, officials opted to extend it to at least 2018 while voting to allow the fund to double its hedge-fund investments.

"They found no smoking gun to convince them to cancel the program,' recalls Ogden.

The pension board also took steps to reduce the red tape in the investment process, giving its senior investment staff "quick-strike authority" to invest up to $1bn without full board approval.

LeBlanc used this authority in the spring of 2010 when he says he got a call from a friend at Paulson & Co., the firm run by hedge-fund star John Paulson. The friend asked: Would the teachers fund join Paulson in providing national mall operator General Growth Properties with new funding to exit bankruptcy?

Paulson lost out on the deal, but the pension fund plowed ahead, joining another group of Wall Street firms that agreed to pay about $10 per share for a large stake in General Growth. The risk was that the shares could fall as the company exited bankruptcy in a difficult retail market. After three weeks of due diligence, the Texas pension made an initial commitment to invest $500m in General Growth.

"No one moved as quickly as they could,' says Adam Metz, General Growth's former CEO.

General Growth turned out to be a big winner. The mall company's shares are worth about $19 today, an 85% gain for the pension fund.

Despite that particular coup, doubters wonder if the strategy is sustainable. "They may think they are the smartest and best investors, but this system cannot work in the long term," says former Rep. Warren Chisum, who in the last legislative session proposed switching new teachers to 401(k) plans.

Pensions officials, such as Harris, say the risks of the alternatives are manageable because the pension fund has ample liquidity to keep paying benefits in the event of big losses.

Texas educators have little choice but to support the pension fund's aggressive investment strategy and Wall Street-style bonuses. But retiree raises can't materialise until the system's funding level improves—to an estimated 90% from its current 82%. One solution, not popular with educators, is to increase the retirement age for teachers to help make up the fund's shortfall.

In the meantime, educators like Vella Pallette, a retired elementary-schoolteacher from the tiny Central Texas town of May, are in limbo. The 78-year-old's $2,000 monthly pension check is her sole source of income. "A little more money," she says, "sure would help."

Two of the most prominent investors in the world, Carl Icahn and Bill Ackman, had Wall Street mesmerized on Friday as years of acrimony exploded into a bruising verbal scrap on live TV.

Initially CNBC was only talking to Ackman, but then the cable TV station put Icahn on as well and all hell broke loose.

The argument centered on nutritional supplements company Herbalife Ltd (HLF), in which Ackman has had a well-publicized short position that Icahn has slammed.

Icahn, 76, who has gone from feared corporate raider to activist investor in more than three decades of dealmaking, called Ackman, 46, a "liar" and "the most sanctimonious guy I ever met in my life."

In a tirade that included expletives, Icahn said he would never invest with Ackman and predicted investors in his Pershing Square hedge fund would lose a lot of money on the Herbalife bet. U.S. news outlets have reported that Icahn has a long position in Herbalife, although he has not confirmed that.

Ackman, who is usually much more restrained than Icahn when speaking publicly, got in a few verbal shots himself. Icahn "does not have a good reputation" and "is not an honest guy," he said.

The altercation quickly became the talk of the financial world, both on trading floors and on Twitter.

"I will never delete today's Ackman vs Icahn CNBC debate from my DVR. Even when DVRs are like Betamaxes, I'll force my grand kids to watch," tweeted Eric Jackson of hedge fund Ironfire Capital LLC.

Business Insider Deputy Editor Joseph Weisenthal tweeted: "It's never going to get any better than what we just saw."

The influential blog ZeroHedge called it the "Ultimate Hedge Fund Deathmatch: Icahn And Ackman As The Real Billionaire Husbands Of CNBC Going Wild."

BusinessInsider held an online poll: "Who Won The Brawl Between Carl Icahn And Bill Ackman?" As of 5 p.m. New York time, 70 percent of the more than 1,800 people who voted declared Ackman the victor.

Neither Ackman nor Icahn could be reached for comment after the CNBC show.

Ackman has called Herbalife a "well managed pyramid scheme" that he predicted will collapse. Herbalife has denied the allegation.

"On CNBC today, Mr. Ackman continued to misrepresent Herbalife," an Herbalife spokeswoman said on Friday.

"Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of our consumers over our 32-year history."

DECADE-OLD DISPUTE

The genesis of their feud stems from a nasty contractual dispute involving a real estate company deal 10 years ago, when Ackman was running his former hedge fund, Gotham Partners, which he co-founded in 1993 with former Harvard Business School classmate David Berkowitz.

After eight years of litigation, a court ruled in Ackman's favor and Icahn was forced to pay Gotham $4.5 million, plus interest.

Indeed, the discussion on CNBC often had little to do with the merits of Ackman's view of Herbalife. At times, Icahn also feuded with CNBC host Scott Wapner, accusing him of "bullying" him when he was pressed on whether he had gone "long" on Herbalife shares.

Icahn may have little to lose from the dustup given that he is simply managing his own money these days. Ackman, on the other hand, manages about $11 billion at Pershing Square, including money from many prominent institutional investors.

Herbalife shares briefly surged over 5 percent when Icahn said during the row that Ackman, by going public with his big short position, would cause the "mother of all short squeezes" in the stock.

A short squeeze is when short sellers are forced to cover their position, a move that pushes a stock higher.

Ackman and Icahn's dislike of each other is well known in financial circles. Some of the tension stems from the fact they both specialize in the same game - taking big positions in companies and agitating for management changes.

Ackman's bet against Herbalife is also being challenged by another big hedge fund player, Third Point manager Daniel Loeb, who has said he holds a big long position on the stock.

It is often said that generals are always preparing to the fight the last war. The same thing could be said of investors as well. Investors are prone to extrapolate the recent past well into the future. For example, nearly four years into a bull market only now are investors beginning to put money back into equity mutual funds.

This point is well-illustrated in a series of graphics from David Rosenberg, via Business Insider, showing magazine covers from the most important eras finance of the past two decades. These include the Internet bubble, housing boom and the Great Recession. These compilations show how investors become slowly convinced as to the inevitability of the trend at hand.

In terms of trends there are few more well-established than the bond bull market. For over thirty years now bond yields have done little more than go down. Maybe because the trend has been so long-standing there is no cluster of magazine covers to highlight it. However a look at the graph below shows just how far yield have come from the end of the highly inflationary decade of the 1970s.

Some investors are taking notice that this downward trend in interest rates at some point has to end. Josh Brown at the Reformed Broker notes how the big bond mutual fund shops like Pimco and DoubleLine are ratcheting up their equity fund offerings to take advantage of what might very well be expected to be a change in interest rate regimes.

It has also brought out some skeptics of bond heavy, risk parity strategies.* What is a risk parity strategy? Michael Corkery at WSJ provides some background its growing acceptance.

A core tenet of risk parity is that when stocks are falling, bond prices typically rise. By using leverage, bond returns can help make up for losses on stocks. Without leverage, bond returns in a typical pension portfolio of 60% stocks and 40% bonds wouldn’t be large enough to compensate for low stock returns.

Leo Kolivakis at Pension Pulse notes risk parity strategies are more than just leveraging up bonds. However the heavy emphasis on bonds is what is giving some writers pause. Roger Nusbaum at Random Roger thinks the demise of risk parity is likely off a few years. However Stephen Gandel at Fortune is skeptical about the idea that leveraging up an asset at the end of a multi-decade bull market is necessarily a good thing. He writes:

But it’s also just the type of talk – that something like levering up your portfolio is safe as long as you use that leverage to buy bonds – that always pops up, and gets taken as gospel, just as bubbles are about to burst.

The bond bull market has gone on, with the help of the world’s central bankers, longer than most anyone would have believed in 1980, 1990 or even 2000. However at a time of calm bond markets and supportive equity markets, investors have the chance to think ahead to how a sustained rise in interest would affect them and their portfolios.

Things change. Bull markets end. Sometimes quietly, sometimes not so quietly, see the stock market implosions of 2000 and 2008. Investors need be sure they are not fighting the last war but are looking ahead to the next one. The bond bull market will end some day and strategies over reliant on an interest rate tail wind will suffer. The big bond market guys are looking ahead. So should you.

**For a more technical take on the theory underlying risk-parity strategies see: Asness, Pedersen and Frazzini, “Leverage Aversion and Risk Parity,” Financial Analysts Journal, January/February 2012.

Over the next year,  I remain convinced the US recovery will gain further momentum and China's growth will surprise to the upside, which is why my focus is on coal, copper, and steel ('CCS'). The key thing to watch is inflation expectations. If growth surprises to the upside, there will be a backup in bond yields and surge in risk assets. Sectors tied to global growth will do better than others.

But is the bond party really over? With all due respect to Leo de Bever, Michael Sabia and Jeremy Grantham, nobody really knows where long bond yields will be in five or ten years. True, historic low yields make bonds seem like a poor and risky investment but the world is suffering from an employment crisis and it won't take much to spark a new depression. This scenario will be bullish for bonds, bearish for risk assets. 

A gauge of planned U.S. business spending rose in December, a sign that business worries over tighter fiscal policy may not have held back investment plans as much as feared at the end of 2012.

The Commerce Department said on Monday that non-defense capital goods orders excluding aircraft, a closely watched proxy for investment plans, edged higher 0.2 per cent. The government also revised higher its estimate for November.