Every time the market plunges, I smell cigar smoke. It filled the halls where I once worked as an analyst for a hedge fund. The fund next door was primarily a short fund, betting heavily that certain stocks would go down. The further the market fell, the thicker the smoke.

A similar scenario has played out over the past month, when markets stopped what had become a vertiginous ascent, driven largely by a bubble of low interest rates, and started behaving erratically. Concerns about interest rates rising became more acute, and currency markets spiraled downward. Then China suddenly devalued the yuan, triggering a huge selloff. Panic was in the air. It was time for hedge funds to shine.

Based on the information available so far, though, that’s not exactly what happened. As I suggested here, maybe hedge funds are for suckers.

A number of the industry’s biggest names had a difficult, some might say brutal, time in August. It’s not surprising, considering that several days brought enormous swings in the market that caused even the most long-term-minded investors whiplash.

David Einhorn’s Greenlight Capital flagship fund fell 5.3 percent in August, putting it at –14 percent so far for 2015, according to Bloomberg News. Third Point, run by Daniel Loeb, saw a 5.2 percent decline in its main fund in August. Ray Dalio of Bridgewater Associates saw his macro fund decline 6.9 percent last month. These superstars performed more dramatically badly than the HFRX Global Hedge Fund Index, which was down 2.2 percent in August and 1.42 percent for the year. The Standard & Poor’s 500-stock index lost 6.3 percent in August and is down about 4 percent in the year to date.

Hedge funds were conceived as boutique investments for the wealthy designed to shield a slice of one’s portfolio from market volatility and provide steady returns. In exchange for this rather esoteric and highbrow service, most funds charge handsomely: a management fee of 2 percent of assets, plus 20 percent of the profits. The pricing model transformed a generation of stock traders into billionaires.

But while hedge funds overall have outperformed the broader market this year, it comes after years of lagging far behind. In 2012-14, when the S&P 500 rose 13 percent, 29.6 percent, and 13.5 percent, respectively, the HFRX index was up only a few percentage points each year, if that.

“August was a fair test, and many hedge funds had a tough time,” Simon Lack, author of The Hedge Fund Mirage, told the New York Times. They “failed to beat a 60/40 [stock and bond index] mix every single year since 2002, and they’re on track to repeat this year.”

The California Public Employees’ Retirement System last year announced it was pulling its entire $4 billion out of hedge fund investments, arguing that they’re hard to understand and too expensive to justify the returns they provide. Expectations at that time ran high that other big pension funds and endowments would follow. The opposite happened.

There is now almost $3 trillion invested in hedge funds. Perhaps this latest market upheaval has a silver (another underperformer) lining, and more investors will ask if they’re worth it.

August was a brutal month for some of the biggest names in the hedge fund industry.

In some cases, losses in August wiped out gains for the year, and now it will be a race against time to rebound and finish the year in the black.

Bloomberg News' Simone Foxman reports that billionaire hedge fund manager John Paulson, who runs the $19 billion Paulson & Co., got crushed in August.

Here's a rundown of how some of his funds performed:

• Paulson Partners fell 4.2% in August, leaving the fund up 6.5% for the year.
• Paulson's Advantage Fund fell 4.9% in August, and it is now down 3.6% for the year.
• Paulson's Special Situations Fund fell 8.4% in August, and it is now down about 12% for the year.

Paulson had his second-worst performance ever last year, with his Advantage Plus fund falling 36% and his Advantage fund falling 29%. In 2014, Paulson Partners ended the year up 0.8%, while the Enhanced fund fell 1.6%.

Paulson, of course, isn't alone.

Activist investor Nelson Peltz's Trian Partners fell 4.8% in August, leaving the fund down 3.45% for the year, Reuters' Lawrence Delevingne and Michael Flaherty reported.

Peltz has had just one losing year: His fund lost 19% during the financial crisis in 2008.

Activist investors Dan Loeb, David Einhorn, and Bill Ackman all took a hit in August, too.

Here's the rundown:

• Loeb's Third Point Off Shore fund, which employs an event-driven and value investing strategy, fell 5.2% and was last up just 0.1% for the year.
• Einhorn's Greenlight Capital flagship fund fell 5.3% in August, bringing the fund down 14% for the year.
• Ackman's Pershing Square Holdings fell 9.2% in August, leaving the fund down 0.1% for the year.

There's a broad perception that hedge funds are created to manage risk and generate returns in all market environments. The wild market swings in August made it clear, however, that in the short run it doesn't always work that way.

The average hedge fund was down 2.2% in August, according to data from Hedge Fund Research, compared with the S&P 500, which fell 6.2%. August was a wild month for the stock market overall, with the Volatility Index (VIX) hitting its highest level in four years while markets got clobbered on August 24.

"People call us a hedge fund," Ackman said on CNBC on Friday. "From an industry perspective, we need to explain better what a hedge fund is."

"I can't tell you where any of our stocks are going to be next month," Ackman said on CNBC, adding that he thought the businesses his fund owned like Mondelez would be much more valuable in the long-term.

So far in September, Ackman's fund is up 0.4%, leaving the fund up 0.3% for the year.

Asset managers domiciled in the Caribbean, seen as a proxy for hedge funds, held $318.5 billion of U.S. government debt as of midyear, an all-time high, the most recent Treasury data show. The barons of risk-taking are adding liquidity to the market as securities firms have stepped back because of heightened regulations after the financial crisis.

The money managers are poised for swings in fixed-income prices as the debate rages over when the Federal Reserve will raise interest rates. Treasurys’ volatility surged to a six-month high in August amid China’s currency devaluation and a global equities rout. The turbulence rewarded bets on sharper price fluctuations in bonds amid global instability and diverging central bank policies.

“There are a lot of cross currents in the marketplace and a lot of competing macro calls,” said Jason Evans, co-founder of NineAlpha Capital, a New York hedge fund specializing in U.S. government debt.

There are more trading opportunities for hedge funds since securities firms curbed risk-taking in the face of higher capital requirements set by the Basel Committee on Banking Supervision and the Dodd-Frank Act in the U.S.

The 22 primary dealers that trade Treasurys with the Fed cut their inventories by 46 percent to $78.7 billion as of last month, from a peak of $146 billion in 2013, Fed data show.

“The pendulum has swung a little from the banks to the buy side, including both traditional asset managers and hedge funds,” Evans said.

Hedge-fund managers have long clung to a doctrine of high fees in good years and bad, minting billionaires and riling investors along the way.

A pair of former Harvard University endowment executives have built the world’s largest stock-focused hedge fund with the opposite approach. Robert Atchinson and Phillip Gross let investors in their $28 billion Adage Capital Management LP keep almost all of their trading gains—and promise refunds if the fund’s performance falters (click on image).

By hedge-fund standards, the practice is nearly unheard of, and this year it may be particularly costly. Adage has underperformed the S&P 500 through August. If they can’t turn things around by the end of the year, Messrs. Atchinson and Gross may hand out the biggest refunds in their firm’s history.

Hedge-fund managers typically collect about 2% of investors’ assets under management every year and about 20% of profits—whether they beat the markets or not.That has put the industry under increasing pressure for what is viewed by critics as a heads-I-win, tails-you-lose proposition. Even managers who fall short of their benchmarks can earn hefty paychecks simply by riding markets higher.

At Adage, Messrs. Atchinson and Gross charge 0.50% of assets, less than at even many actively managed mutual funds. They also pay themselves only for trading profits that beat the S&P 500, including dividends—they take 20% of the returns above the S&P. And they pay back up to half of those fees if they fall short of the benchmark in the subsequent year.

Its system pays off for Adage in one important way: It collects its full incentive fees even if it loses money, as long as it beats the benchmark. Most fund managers collect performance fees only if they produce positive absolute returns.

Adage is getting harder to dismiss as an anomaly. The firm has nearly doubled in size over the past four years and is now one of the world’s 10 largest hedge funds.Its approach also reflects a bigger structural change in the industry. Many of the public retirement plans and other institutional investors that have poured money into hedge funds for years have hit their limits on what they can allocate to the sector. To keep the gas pedal on growth, hedge-fund managers are increasingly recasting themselves as something closer to staid money managers like Fidelity Investments. In many cases, that means taking a different tack on fees.

For instance, a new wave of single-bet deals, known as co-investments when sold by firms like Magnetar Capital LLC and Trian Fund Management LP, often carry half-off prices on performance fees compared with traditional hedge funds.

“That’s how I think the world should look,” said Jack Meyer, the former head of Harvard’s endowment. Mr. Meyer’s $10 billion Convexity Capital Management LP only collects performance fees when it exceeds a market benchmark. “I’m surprised it has taken the world so long to get there,” he said.

Despite the drumbeat for change, hedge funds as a group haven’t altered their practices. Money continues to pour into the $2.9 trillion industry as plenty of wealthy investors still appear willing to pay high fees for access to complicated strategies and the promise of protection against market swoons. The average hedge fund charges a 17.7% annual incentive fee, down from 19.3% at the start of 2008, according to HFR Inc.

Still, the industry has come under an unusual amount of pressure that threatens its ways of doing business long term. The California Public Employees’ Retirement System, the nation’s largest public pension, said last fall it would eliminate its entire $4 billion investment in hedge funds due in part to concerns about high costs, and other public pensions have followed suit.

From offices high in Boston’s John Hancock Tower, Adage’s founders preside over an operation that bears little resemblance to most hedge funds. There is no central trading desk or bullpen area to swap ideas, people familiar with the firm said.

Investment analysts, 26 in total including the founders, work silently in separate offices ringing the floor. Six golf putting holes dot the space, people familiar with the firm said, though they are rarely used except for a half-hour tournament each December in which the winner gets no money. A person who has been inside described it as a “library.”

Adage’s founders still make plenty of money. Last year, the founders and staff split an estimated $400 million in gross earnings after the firm’s main fund rose 18.4%, people familiar with the matter said. Still, that is less than a third of the more than $1 billion they would have collected under a typical hedge-fund fee structure.

The founders break from tradition in small ways, too. Mr. Atchinson drives a seven-year-old Nissan Altima, and Mr. Gross takes the Peter Pan bus to his summer home on Cape Cod.

“That’s just how they approach life in general,” said Timothy Peterson, founder of Regiment Capital Advisors LP and a former Harvard colleague of the founders. “They feel very comfortable not being the center of attention.”

Because of its unusual practices, Adage is viewed by its large investors as its own breed. The University of California system’s $98 billion endowment has $1.4 billion riding on Adage—more than in any other stock investment except for three low-cost index funds, which it considers to be in the same category. Endowment Senior Managing Director Scott Chan said, “a lot of people would call them a hedge fund,” but that he isn’t particularly concerned about the distinction.

Since it was started with $3.8 billion in October 2001, Adage has produced an average annualized return, after fees, of about 9.7%, beating the S&P 500’s 6.4% pace, including dividends. The average stock-focused hedge fund averaged 5.3%. Adage is down 3.53% this year through the end of August, worse than the benchmark’s drop of 2.88%, including dividends.

Until this year, Adage fell short of the benchmark and passed out refunds only twice. That happened in 2002 and 2008, after it lagged behind the S&P 500 by 0.18 percentage point and 0.75 percentage point, respectively.

Unlike most hedge funds, which juggle a variety of offsetting bets, Adage holds far more bullish bets than bearish ones and keeps its proportion of the wagers static. Bets on industries must be equal, percentagewise, to that sector’s representation in the S&P 500. That means the firm’s more than 1,500 stock positions tend to ride the ups and downs of the benchmark. Any difference comes from individual stock picks, such as the firm’s roughly $500 million position in Puma Biotechnology Inc., which has more than quadrupled in value since the start of 2013.

Messrs. Atchinson and Gross met as investment analysts in the mid-1980s at Harvard’s endowment. Mr. Atchinson, 57 years old, traded mostly aerospace and defense firms, while Mr. Gross, 55, focused on drug companies and other health-care stocks.

When Mr. Meyer took charge of the endowment in 1990, he put his traders on notice: Beat the benchmark or find a new job. Many left. Messrs. Atchinson and Gross took on the challenge, initially topping the benchmark by 0.50 percentage point and more in subsequent years. They got rich—Harvard paid them a bonus of around 4% of their outperformance, at peak amounting to more than $10 million apiece—but drew scorn from some alumni and professors unhappy about the hefty paydays for an academic institution.

In part because of the scrutiny, Mr. Atchinson persuaded Mr. Gross to leave in 2001. They took with them an 18-person team and $1.8 billion day-one investment from Harvard in exchange for an agreement, since phased out, to tithe a portion of their firm’s future earnings to the school.

The founders’ move from academia to hedge funds came with an added bonus: a chance to refashion themselves as symbols of frugality after years of criticism for their pay. Adage’s unique position, with one foot inside the lucrative hedge-fund industry and one foot out of it, is perhaps most plain on weekends during the summer.

Like many hedge-fund managers, Mr. Atchinson, who goes by Bob, heads to his vacation home on Nantucket. Unlike his peers, Mr. Atchinson usually hops on a commercial Cape Air flight. When he does fly private, it is on “Air Mom,” his name for the single-engine turboprop in which he owns a one-eighth share and often ferries around his mother.

Back at Boston’s Logan Airport on Monday mornings, he waits for a taxi to take him into the office.

All of the private equity experts that we asked to look at the video of the latest CalPERS Investment Committee meeting were appalled by the performance not only of CalPERS’ private equity staff but also its board members. As Georgetown law professor Adam Levitin said via e-mail:

It’s shocking to see how many of the CalPERS investment committee are utterly ignorant. Aren’t these people supposed to know something?

And as Andrew Silton, the former Chief Investment Advisor to the State Treasurer of North Carolina, wrote on his website:

What’s the best defense against capture? A strong staff and informed trustees. The CalPERS video strongly suggests that CalPERS is lacking on both fronts.

It is hard to overstate the vehemence of the reactions I’ve gotten to the video of the CalPERS’ last investment committee meeting. In the majority of cases, when I’ve asked for a mere quote, the respondents were so disturbed by what they saw that they penned commentary that ran to multiple pages. For instance, Andrew Stilton, who had stopped financial blogging months ago to pursue his art, felt compelled to come out of retirement to write not just one, but three posts on the Investment Committee meeting train wreck.

CalPERS’ Investment Committee bears significant blame for the poor performance of CalPERS’ staff. Most CalPERS board members seem to regard their job as cheerleading and protecting CalPERS’ senior officers, rather than acting as vigilant protectors of CalPERS’ beneficiaries. This misguided sense of priories was evident when Investment Committee chairman Henry Jones repeatedly undermined fellow committee member JJ Jelincic’s questions. Jones acted as if Jelincic was putting the private equity team members on the spot, when competent industry professionals should have been able to field Jelincic’s questions easily. Similarly, other board members allowed staff to give misleading and incomplete answers.

But even worse than the board’s lax attitude toward oversight is its lack of expertise. The presentation that led Jelincic to pose those not-difficult questions that nevertheless put the CalPERS officer responsible for private equity, Réal Desrochers, on tilt, was an insultingly basic primer on “carry fees,” which is the 20 in the prototypical “2 and 20” private equity fee scheme. The “20” stands for a 20% profit share once a preferred return, typically 8%, has been met. Stunningly, most of the Investment Committee members seemed pleased by the slideshow and acted as if they had learned something from it.

In other words, the board is so utterly lacking in knowledge that it is incapable of providing adequate oversight, even if it were inclined to do more than governance theater. That means that staff operates with no meaningful supervision. The bumbling, evasiveness, and apparent lack of command of what should be basic material is exactly what you’d expect to see as a result of letting the inmates run the asylum.

Yet Investment Committee members display their ignorance as if it were a badge of honor. Consider this speech from the end of the session:

Vice Chairman Bill Slaton: What I’ve gleaned from this, and I’d like to just kind of make some comments at a higher level than where we’ve down in the weeds. It’s very clear to me that the terms and conditions of private equity deals vary by general partner and by vintage. There’s no set process. It’s a negotiation.

It’s also clear to me that there’s a large number of investors for GPs to choose from, that CalPERS is not the only investor out there, and so therefore, our ability to get the industry to change is something that I appreciate that we’re leading on, but we can’t control. But I think we’re making progress.

It’s clear this is a largely unregulated industry that we’re trying now….that the United States is trying to do a better job regulating. And I’m glad that CalPERS is a participant in that.

I read in the press terms like, you know, hide and cheat and steal. I think those are inappropriate terms. I think we have an industry that probably needs more regulation, but I — what I want us to focus on is to make sure that we are gleaning as much data as we can, and that we see the progress that’s attained, and we start to see the reports.

I have faith in this group in front of us that you’re negotiating on behalf of CalPERS, as well as it can be done. So I’m not trying to….and I don’t think we should spend a lot more time trying to find where there’s an error or a problem. I think you all are on to this, that you’re working hard at it, and I think that there’s value in us better understanding what the range of possibilities are. So bring scenarios back to us and how it works, like you did here, is instructive for us. But I don’t think it’s productive for us to spend a lot of time trying to play gotcha.

As Rosemary Batt, co-author of the landmark book Private Equity at Work, said:

I was completely appalled to listen to Bill Slaton as apologist for the staff. It reminded me of the Public Relations Director of Wal-Mart in the documentary, “Is Wal-Mart Good for America?” The notion that the GPs can choose whom they want to, putting CalPERS in a defensive posture, is absurd.

Let’s go through Slaton’s remarks in detail.

Slaton starts out by obliquely criticizing Jelincic’s efforts to get answers to what are simple questions by as being “down in the weeds.” He then parrots the diversion that Réal Desrochers relied on earlier in the meeting, that he couldn’t answer a question from Jelincic because everything was deal-specific. As Oxford professor Ludovic Phalippou said about that exchange, “The PE team line of defence is incredibly amateuristic. I would fail my private equity students if they wrote such a thing in their exam.”

Slaton continues with a claim straight out of the Private Equity Growth Council, the private equity industry’s chief lobbyist, and presumably also invoked by CalPERS’ staff, that private equity agreements are negotiated. Again, as Professor Phalippou, who has read 300 private equity agreements stressed, they are in fact “take it or leave it” agreements. As a former private equity partner said, “General partners have done a masterful job of dividing and conquering the limited partners on the negotiation process.”

Slaton then moves on to another bit of general partner propaganda that he, and apparently CalPERS’ staff, have swallowed, namely, that it is CalPERS that has to compete to get general partners’ attention, and not vice versa. As Elieen Appelbaum, co-author of Private Equity at Work, wrote:

I find these responses, which I am sure are sincere, simply incredible. Public pension funds make the single largest contribution to PE fundraising of any type of investor. Data provided by PitchBook show that public pension funds contributed between 15% and 25% of all funds raised by private equity in the years from 2000 to 2012. In 2013 public pension funds contributed 24.5% of all funds raised by private equity; and in 2014, 21.5%. One might reasonably expect pension funds to demand respect and deference from PE firms when the latter come, hat in hand, seeking capital for their private equity funds. Certainly CalPERS, which makes large investments in private equity year after year and whose lead is followed by many other pension funds should be sought after by GPs, not told by GPs – as is apparently the case – not to make demands because there are many investors for GPs to choose from.

Slaton then notches his defense of private equity up a register and objects to the usage of words like “hide and cheat and steal” when applied to private equity. Perhaps he needs to read the press more extensively or acquaint himself with a dictionary.

Private equity investors were upset when they leaned about fees like “termination of monitoring fees” of tens, sometimes hundreds of millions of dollars, via Gretchen Morgenson of the New York Times, particularly when they realized those fees were not shared with them in management fee offsets. They were similarly stunned to learn from Mark Maremont of the Wall Street Journal that KKR’s captive consulting firm KKR Capstone, was treated by KKR as being an independent contractor. That means KKR charged hundreds of millions of dollars of dollars for KKR Capstone services, when investors had assumed that was already covered by the management fee.

If someone is taking a lot of money out of your investment and hasn’t told you about it, pray tell how is that not hiding?

Similarly, how is it not cheating when KKR shifted nearly $20 million of broken deal expenses onto limited partners, when they should have been borne by co-investors that included KKR affiliates? The SEC deemed KKR’s conduct to be abusive enough to warrant $10 million in fines.

And how is it not stealing when former SEC enforcement chief Andrew Bowden said of private equity general partners, “Investors’ pockets are being picked”?

In other words, Slaton professes to support the effort to get tougher on the industry, as long as no one actually describes its bad conduct in simple, plain English terms. Perhaps he is concerned that the great unwashed public will wise up as to how general partners have fleeced limited partners like CalPERS for years, and the limited partners and overseers like him have done perilously little to prevent it .

Slaton then says, with a straight face, that the private equity team at CalPERS is doing a great job of negotiating, when he has no basis for his opinion. Andrew Silton, who has been the chief investment officer of a substantial private equity portfolio, begs to differ:

Like any large investor, CalPERS must systematically attack every sort of fee and vigorously negotiate deal terms. These are the only two techniques that can give a large institution marginally better performance and control over its private equity program. Clearly, the current team at CalPERS has failed to do both.

Slaton wraps up by saying he has no intention of doing his job as a board member: “I don’t think we should spend a lot more time trying to find where there’s an error or a problem.” Slaton finishes by plainly stating that he regards the work of supervision and governing as “gotcha” and sees it as beneath him. I trust Governor Jerry Brown is paying attention and finds someone else to install in Slaton’s slot.

We see similar undue protectiveness of staff in Henry Jones’ closing remarks. He used the fact that CalPERS has yet to complete its new private equity IT reporting system, PEARS, to justify the inability (and often, refusal) of staff to answer Jelincic’s questions, when he made clear that virtually all of them did not depend on data.

Chairman Henry Jones: Okay. I think it’s also important to realize that earlier in the day, Mr. Eliopoulos did indicate an update on the private equity project, the PEARS project, where he indicated that he has collected about 94 percent of the data that’s necessary to maybe answer a whole host of questions that we’ve been asking, and that he plans to come back to the Committee to present that information to us.

And so I think it’s important that we know. And matter of fact, he also stated in his comments this morning, that they actually went live and parallel on this particular project that they’re working. So it’s getting there.

And I know that we all are interested in understanding some of the complexities of private equity
investment. But I think we need to be patient too to make sure that we get all of the information and get the accurate information, because I think there’s been too many misquotes, too much misinformation that’s been in the public.

And as you know, when information is provided to the press, and many times they go with what they were told, and many times it’s not accurate information coming from our Investment Office. So I would encourage us all to be a little patient, and certainly answer J.J.’s questions when the data is available, or if he has specific requests that he can provide that request to you and – so that it can be responded to.

Jones’ repeated incantation, “We need to be patient” is mind-boggling. CalPERS has been investing in private equity for 25 years. Staff has, or ought to have, the sort of basic, general information that Jelincic has requested at hand.

And notice Jones tried to depict the press as being inaccurate. That’s simply bogus. I challenge Jones to cite a substantive point in which the media has provided faulty information about CalPERS in the recent fee controversy. The proof is that CalPERS does not appear to have asked for, and more importantly, has not gotten, a single retraction.

By contrast, as we’ve seen in the last two Investment Committee meetings, CalPERS’ staff has repeatedly told the board things that are flat out wrong or so heavily spun in favor of private equity general partners as to be incorrect. So how, pray tell, can Jones defend staff as the gold standard of accuracy?

Jones is effectively telling his fellow board members to regard the staff as the only valid source of information. And if board members don’t consult and cultivate independent channels for news and intelligence, they are guaranteed never to challenge staff. That guaranteed that the board will continue to do a poor job of oversight.

CalPERS’ reaction to having its private equity failings exposed has not been to correct these problems, but to attack the people who’ve unearthed them and defend parties who should be held to account. And its board reinforces this pathological response. Sadly, this behavior is guaranteed to produce more self-inflicted wounds and diminish CalPERS as an institution.

Executive Summary
Senior Private Equity Officers at CalPERS Do Not Understand How They Guarantee That Private Equity General Partners Get Rich
CalPERS Staff Demonstrates Repeatedly That They Don’t Understand How Private Equity Fees Work
CalPERS Chief Investment Officer Defends Tax Abuse as Investor Benefit
CalPERS, an Anatomy of Capture by Private Equity
CalPERS’ Chief Investment Officer Invokes False “Superior Returns” Excuse to Justify Fealty to Private Equity
CalPERS’ Senior Investment Officer Flouts Fiduciary Duty by Refusing to Answer Private Equity Questions
How CalPERS’ Consultant, Pension Consulting Alliance, Promotes Intellectual Capture by Private Equity

I got to hand it to Yves Smith, she's been on top of CalPERS and private equity like a fly on manure, but the problem with Yves is she's on some crusade to expose private equity's dirty little secrets and tends to focus exclusively on the negatives, ignoring how important this asset class has been to delusional U.S. public pension funds looking to make their pension rate-of-return fantasy.

Don't get me wrong, there are plenty of problems in the private equity industry, many of which I cover on my blog, but if you read the rants on Naked Capitalism, you'd think all these private equity funds are peddling is snake oil and that investors are better off investing in a simple 60:40 stock bond portfolio.

This is pure rubbish and spreading such misinformation shows me that Yves Smith doesn't really know much about proper asset allocation between public and private markets for pension funds that have long dated liabilities and a very long investment horizon. Ask Ontario Teachers', CPPIB, and many other large pension funds the value-added private equity has provided over public market benchmarks over the last ten years (Canadian funds invest and co-invest with private equity funds, reducing fees, and invest in PE directly, foregoing all fees).

Having said this, I too watched the CalPERS board meeting and the clips Yves Smith posted, and was surprised at how much stonewalling was going on. To be honest, I felt bad for Christine Gogan as she was clearly used as a scapegoat. Her boss, Réal Desrochers and his boss, Ted Eliopoulos, and Wylie Tollette should have been the people answering all these questions and getting grilled by JJ Jelincic.

Under intense security and privacy, 12 people are gathering in Washington DC to make decisions that could change the lives of everyone in the US – and much of the rest of the world.

The Federal Open Market Committee (FOMC) will on Wednesday and Thursday thrash out a decision on whether to raise US interest rates, which have been held at near-zero since the 2008 financial crisis.

For months, economists had been expecting a rate rise (dubbed “liftoff” by Fed officials) at this meeting, but their enthusiasm has waned markedly following last month’s global stock market panic over the health of the Chinese economy.

The decision will be announced by Federal Reserve chair Janet Yellen at a highly anticipated press conference in Washington on Thursday. Even if rates aren’t raised, every word that she says – and how it reflects the committee’s confidence in the US economy – has the potential to significantly move global markets.

The decision will be announced by Federal Reserve chair Janet Yellen at a highly anticipated press conference in Washington on Thursday. Even if rates aren’t raised, every word that she says – and how it reflects the committee’s confidence in the US economy – has the potential to significantly move global markets.

The FOMC members, who are often in close agreement, appear to be deeply split about whether they think the economy can handle an increase in rates, which could put companies off investing and hiring more employees.

John Williams, an FOMC member and president of the Federal Reserve Bank of San Francisco, has been bullish about the strength of the US economy for most of the year but appeared much more cautious last week.

“All of the data that we have had up until now has been, I think, encouraging,” he said in an interview with the Wall Street Journal. “But there are some pretty significant – and I would say have now grown larger – headwinds that have developed.”

His counterpart from Minneapolis, Narayana Kocherlakota, is even less confident. “I don’t see a near-term increase in interest rates as being appropriate, and by near-term I mean really through the course of 2015,” he told CNBC at the recent central bankers jamboree in Jackson Hole, Wyoming.

Bill Dudley, the president of the New York Federal Reserve and the most important US central banker after Yellen, has also said the idea of raising rates this month isn’t as “compelling” as it was before the China-led stock market chaos.

On the other side of the table, Stanley Fischer, the Fed’s vice-chairman, has said recent “impressive” jobs growth – to the level the government considers effective full employment – creates a “pretty strong case” to raise rates in September. “We’re getting back to normal and at some point we will want to show that, by beginning to normalize interest rates,” he said recently.

Eric Rosengren, president of the Federal Reserve Bank of Boston, reckons employment conditions needed for a rate rise have “largely been met”, but he is less certain on inflation. “Recent reports on wages and salaries still show few signs that the tightening labor markets are translating to increases in wages and salaries consistent with reaching 2% inflation,” he said.

US prices have risen by 0.3% over the past year, and inflation has lingered below the Fed’s 2% target for more than three years.

Goldman Sachs analysts this week said in a report they expect rates to be left unchanged, but think the Fed will signal that “liftoff is near”.

ING economists said Thursday’s decision will be “the most eagerly awaited in years”, though they also expect rates to be left unchanged – “but this is a very close call”.

Despite harrowing market volatility and rising anxiety over global growth, 49 percent see the Fed hiking rates this month. Of the 51 economists, money managers and strategists who responded 43 percent say the first hike will come later, down 4 points from the August survey. The percent saying they are unsure rose to 8 percent from 5 percent.

"It is time for the FOMC to start bringing monetary policy slowly out of its 'self-induced coma' in response to much improved vital signs for the U.S. economy," said Stuart Hoffman, chief economist of PNC Financial Services Group.

In fact, respondents have rethought their forecasts from the nervous days of August and moved ahead their forecasts for nearly all monetary policy moves. They now forecast that the Fed will begin reducing its balance sheet in August 2016, compared to September in the prior survey. The Fed is forecast to finish hiking (or hit its "terminal rate") this cycle in the first quarter of 2018, six months earlier than the previous call.

"The 'data dependent' Fed has all it needs to hike rates," wrote Jim Bianco, president of Bianco Research. "If they do not, it is because of 'financial stability' concerns. If they do hike, they are announcing the stock market's volatility does not matter."

The market continues to call for a very modest set of increases, with the Funds rate ending 2015 at just 37 basis points and 2016 at 1.17 percent. The terminal rate is forecast to be only 2.7 percent.

Calls for a hike come with global growth worries remaining center stage. It was chosen by 45 percent of respondents as the No. 1 threat to the U.S. recovery, up from 29 percent in July. And the chance of a recession in the next 12 months, though it remains low, rose for the third straight month to 18.6 percent, a three-year high.

Most, however, sided with Constance Hunter, chief economist of KPMG LLP, who said, "The Fed should raise in September as the economy is strong enough to withstand a normal low-rate environment."

The Federal Reserve this week could announce its first interest-rate hike in nine years.

The Federal Open Market Committee statement containing the answer to the question of whether there will be a hike or not is set to come at 2 p.m. Eastern on Thursday.

The Fed will simultaneously release its new economic projections and interest-rate forecasts at 2 p.m., and Chairwoman Janet Yellen is slated to speak to the press at a 2:30 p.m. press conference.

The current consensus of Wall Street economists is that the Fed will wait until October at the earliest to raise rates, given concerns about China and recent surveys showing weak consumer and business confidence. But a minority say the rate increase will come on Thursday, and in futures markets traders are pricing in a 1-in-4 chance of a September hike.

A former aide to Janet Yellen told MarketWatch that the September rate decision is a toss-up.

Consumer expectations for inflation three years ahead fell last month to the lowest level in records going back to June 2013, according to a Federal Reserve Bank of New York survey released Monday (click on image).

The median respondent to the New York Fed’s August Survey of Consumer Expectations predicted annual consumer price inflation three years hence would be 2.9 percent, down from 3 percent the month before. Median expected inflation a year ahead fell to 2.8 percent from 3 percent, marking the second-lowest response in the history of the survey.

The results come ahead of Sept. 16-17 meeting of Fed policy makers in Washington at which Fed Chair Janet Yellen and her colleagues will debate whether to raise interest rates for the first time in nearly a decade.

Officials said in a statement following their last meeting in July that they needed to see “some further improvement” in the job market and be “reasonably confident” in the inflation outlook. Their preferred measure of prices, the personal consumption expenditures price index, was up 0.3 percent in July from a year earlier and has run below the central bank’s 2 percent target for over three years.

Fed Vice Chairman Stanley Fischer attributed much of the current shortfall to the recent drop in oil prices and appreciation of the U.S. dollar during an Aug. 29 speech in Jackson Hole, Wyoming.

“Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said.

Ray Dalio, founder of $154 billion Bridgewater Associates, said he’s worried about the next economic slowdown because monetary policy will be less effective than in the past.

“I don’t care whether they raise 25 basis points,” Dalio said Wednesday in an interview with Tom Keene and Michael McKee that was broadcast on Bloomberg radio and television. “What scares me, or what worries me, is what the next downturn in the economy looks like, with asset prices where they are and a lesser ability of central banks to ease monetary policy.”

He predicted that returns across asset classes over the next decade will only average 3 percent or 4 percent. Narrower spreads will make it much harder for asset purchases to have a big effect on the market, he said.

As the U.S. Federal Reserve meets Thursday to decide whether to raise interest rates, Dalio said a big increase in the near future is impossible because the global environment requires lower borrowing costs. He reiterated that the central bank will eventually return to quantitative easing.

Dalio, who manages the world’s biggest hedge fund, is among a small number of prominent money managers who have urged the Fed not to raise interest rates. Jeffrey Gundlach, co-founder of DoubleLine Capital, has said the Fed would have to reverse course if it raises rates prematurely.

‘Downturn’ Coming

“We will have a downturn,” Dalio said in the interview.

Futures contracts show a 28 percent probability that the Fed will boost rates when it meets this week, according to data compiled by Bloomberg. That was down from 48 percent on July 30. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase, versus the current target of zero to 0.25 percent.

Economists are split on what action Fed policy makers will take on Thursday. More than half of 111 analysts in a Bloomberg survey predict no change, while 50 say the rate will be increased by 0.25 percentage point and four see a 0.125 percentage-point increase.

Dalio’s Pure Alpha hedge fund strategy, which accounts for roughly half his assets, has gained 6 percent this year, he said. His passive, long-only strategy, known as All Weather, is down about 6 percent, he said.

Dalio said August was a “lousy” month for his firm, as concern about slowing growth in China sent global markets tumbling, erasing more than $5 trillion from stocks around the world. He said that in the longer run, China will manage its challenges, even if it won’t return to growth rates of the past.

“I think China is going to be just fine,” Dalio said. “But its going to be weaker.”

"The Fed is really the central bank of the world. If the Fed raise rates a little bit, it will have an impact all over the world, particularly in emerging markets," Rubenstein told CNBC's "Squawk Box."

"I think the Fed is sensitive to that, and I think therefore the Fed is likely to wait for another month or two to get additional data and probably telegraph a little bit better than it has now that it's about ready to do it at a particular time."

Forget the Iowa caucuses or the New Hampshire primary. One of the more intense and dogged campaigns is currently being waged by Bank of America to convince shareholders that Brian T. Moynihan should keep his job as both chairman and chief executive.

Top bank executives and one of its board members have pounded the pavement from London to Houston, lobbying dozens of investors. They cut a deal to mollify one outspoken critic, and they enlisted the help of the former Massachusetts congressman Barney Frank, an architect of Wall Street’s regulatory overhaul. Mr. Frank said he agreed to make the case for Mr. Moynihan after discussing the issue with his neighbor, an executive at Bank of America, the nation’s second-largest bank.

The battle engulfing the bank has had, at times, the feel of a local City Council race. It has featured a cast of characters including a Roman Catholic priest, Warren E. Buffett and two giant California pension funds that have mounted an aggressive countercampaign to strip Mr. Moynihan of his chairmanship.

As many as 40 percent of shareholders were expected to vote against Mr. Moynihan from the outset, leaving about 60 percent up for grabs — a huge group that includes major money management firms like T. Rowe Price and BlackRock.

That the vote, scheduled for Tuesday in Charlotte, N.C., has proved so contentious shows the depths of discontent with Bank of America, mostly over how the bank’s board decided to give Mr. Moynihan both titles in the first place. It did so unilaterally last year, overturning a previous shareholder vote in 2009 that required the bank to have a separate chairman and chief executive.

But the battle also illustrates how the byzantine world of corporate governance can consume the time and attention of a company’s leadership.

Bank officials say Mr. Moynihan, chief executive since 2010, earned the right to also become chairman last year, having steered the company through a near-death experience after its costly acquisition of Countrywide Financial in 2008 and Merrill Lynch in 2009. They say there is no conclusive evidence that companies with separate chief executives and chairmen perform better than those that don’t divide the roles.

The two pension funds leading the charge against the bank — the California Public Employees’ Retirement System and the California State Teachers’ Retirement System — argue that an independent chairman would provide better oversight of a bank with a troubled history.

“Since Mr. Moynihan’s appointment as C.E.O. in January 2010, the company has continued to underperform, has failed important Fed stress tests, and has perpetuated a subpar engagement with its shareholders,” the California pension funds wrote in a joint letter to the bank’s lead independent director last month. “Given these missteps, we do not believe now is the time to reduce oversight of management by combining the roles of C.E.O. and chair.”

The pension funds’ sway goes beyond their less than 1 percent ownership of the bank’s shares. They have been calling and writing to the largest shareholders — including some firms they may pay to manage money on behalf of the California pensioners — urging them to vote against the combined role.

For some shareholders, the C.E.O.-chairman vote is more of an incidental bargaining chip. When the issue came up in 2009, for example, union groups that supported separating the roles were also pushing behind the scenes for the right to organize Bank of America employees, according to people briefed on the matter.

If anything, the current contest — which has reached a fever pitch this week — has been an unwelcome distraction for Bank of America just as it had put most of its legal and regulatory troubles behind it.

In 2013, JPMorgan Chase’s chief executive and chairman, Jamie Dimon, faced a similar vote, which had been stoked by the bank’s embarrassing trading loss, known as the London whale. Mr. Dimon prevailed.

Bank of America’s campaign is being run by its general counsel, Gary G. Lynch, and its head of global marketing, Anne M. Finucane, who has labored for years to burnish Mr. Moynihan’s image as a banker willing to work with regulators and community groups to right the wrongs of the financial crisis.

That image was dimmed by the board’s decision last October to overturn a bylaw that required the bank to keep its chairman and chief executive roles separate. The board argued that like most big American companies, Bank of America should have the ability to decide whether to grant its top executive one or both titles.

Still, some shareholders and others were outraged. Sensing his moment, the Rev. Seamus Finn proposed putting the issue to a vote at the bank’s annual meeting in May.

Father Finn, a Catholic priest who advises church groups on investment issues and is chairman of the Interfaith Center on Corporate Responsibility, said the leadership question was not his primary concern, but he figured that a proposal to split the role would probably get him a meeting with the bank’s top leadership.

It worked. Bank of America agreed to give Father Finn what he really wanted — a report detailing what went wrong at Bank of America during the mortgage crisis. And in return, Father Finn said he agreed to dropped his proposal to divide the top positions.

Even though the issue did not make it on the ballot at the annual meeting, the proxy advisory firms Institutional Shareholder Services and Glass Lewis urged the bank’s shareholders to vote against members of the board’s corporate governance committee because of the unilateral decision to combine the titles.

Acknowledging the extent of the shareholders’ displeasure, the bank decided to put the issue to a special vote and started campaigning.

A major player in the effort is the bank’s lead independent director, Jack O. Bovender Jr., a former health care executive and Duke University trustee. Described by a bank colleague as the consummate Southern gentleman, Mr. Bovender has been making the rounds of investors, explaining why the board moved to make Mr. Moynihan both chairman and chief executive.

Mr. Bovender has not been able to win over everyone, though. In a conversation last month, he told Institutional Shareholder Services how he agreed to take a leadership role at the bank only if no other board member wanted to step in.

Mr. Bovender was speaking “tongue in cheek,” a person briefed on the matter said. But apparently the proxy advisory firm did not see it that way, calling his anecdote “particularly telling.”

“While shareholders should be glad that Bovender stepped into this leadership vacuum by accepting the lead director role,” it wrote in its report, “it calls into question the board’s acceptance of an individual without relevant industry experience.”

With I.S.S. and Glass Lewis recommending that the jobs of chief executive and chairman be separated, the bank most likely lost as much as 30 percent of the vote because certain shareholders vote automatically with the proxy firms, people briefed on the matter said.

In trying to win over other investors, the bank has had to navigate somewhat unfamiliar territory. Each large investor approaches these votes differently. Some firms consider the opinions of their portfolio managers and analysts, who recommend whether to buy the bank’s shares. Others allow only their corporate governance committees to weigh in.

Bank of America cannot even lobby its largest shareholder, BlackRock, directly. Because BlackRock is partly owned by another bank, PNC Financial Services, the giant asset manager has to outsource its vote to an independent fiduciary so as not to run afoul of the Bank Holding Company Act.

A BlackRock spokesman declined to name the outside fiduciary, citing “company policy.”

Last week, Bank of America got help from Mr. Buffett, who said in a television interview that Mr. Moynihan deserved both titles.

Then, Mr. Frank voiced support for the combined roles, calling Mr. Moynihan “one of the more constructive” bank leaders in helping shape recent financial regulation.

Mr. Frank is not a Bank of America shareholder. But his endorsement could persuade some unions or progressive-minded investors to break from the California funds and back the bank’s position.

Mr. Frank said he volunteered to speak publicly after discussing it with his neighbor in Newton, a Boston suburb, who works for the bank in communications and public policy. Mr. Frank, who recently joined the board of Signature Bank, a small commercial bank in New York, said the most important oversight of financial companies comes not from its directors but from regulators.

“People expect too much of boards,” he said.

The funds, overseen by New York Comptroller Scott Stringer, hold 25.2 million shares, which would place them roughly in the top 60 shareholders based on the latest publicly available information.

Investors will vote on Sept. 22 on bylaw changes made last year to give Moynihan the additional job. That move undid a vote by shareholders in 2009 to require an independent chair.

The vote is expected to be close. Other large investors that have also said they will vote to separate the Chairman and CEO roles include the California Public Employees' Retirement System and California State Teachers' Retirement System.

Via email, a Bank of America spokesman said the bank has turned itself around since the financial crisis and wants "the same flexibility on corporate governance as 97 percent of the S&P 500. We respectfully recognize that stockholders have varying views, which is why the board committed to holding the vote."

Warren Buffett thinks Bank of America CEO Brian Moynihan is doing a great job.

Business Insider reached out to Buffett, who took a huge stake of Bank of America preferred stock and warrants four years ago, and asked for his take on the bank's shareholder vote coming up later this month.

To recap: Bank of America's vote gives shareholders the opportunity to sign off on, or reject, its plan to combine its chairman and CEO role into one under Moynihan.

The plan has some critics, with a small group of shareholders representing less than 1% of its stock banding together to say they're opposed to the consolidation.

The Oracle of Omaha, according to a representative for Berkshire, is "100% in support of Mr. Moynihan and believes he is doing an outstanding job for Bank of America shareholders."

"When he took over as CEO, he was handed one of the toughest jobs in the history of American banking."

The bad news for Moynihan is that neither Berkshire’s preferred shares or warrants hold a vote, meaning Buffett has no recourse to participate in the shareholder vote.

But having the billionaire investor on his side must be heartening for Moynihan.

Brian T. Moynihan, the Boston banker and lawyer who became chief executive of Bank of America, is facing the first shareholder challenge of his five-year tenure as concerns mount over his leadership and the bank’s performance.

Moynihan, a Wellesley resident, has shepherded the nation’s second-largest consumer bank through the financial crisis and its aftermath, settling billions of dollars in federal lawsuits over bad mortgages and faulty foreign-exchange practices, shedding unprofitable units, closing hundreds of branches, and shoring up capital to withstand another economic shock.

But shareholders are wondering whether the 55-year-old executive, known for hard work and sharp thinking rather than salesmanship, is best able to lead the bank into a new era of growth.

On Tuesday, they’ll vote during a special meeting on whether to bless a decision made last year — without consulting shareholders — to expand Moynihan’s authority by making him chairman of the board of directors as well as CEO.

On paper, it may be a vote about corporate governance, but analysts and bank observers say that it has become much more, a test of the confidence shareholders have in Moynihan, the board, and the bank’s direction.

“The stakes are exceptionally high,” said Cornelius Hurley, the director of Boston University’s Center for Finance, Law & Policy. “Is this a referendum on him? Absolutely.”

Moynihan is expected to win the vote, and even if he doesn’t, he would still run the bank’s operations, fetching a $13 million salary. But a smaller margin of victory — less than 60 percent of the vote — could weaken Moynihan, analysts said.

“Now, if he loses the vote, it does mean a damn thing. He’s gotten a clear no vote of confidence,” Richard Bove, a financial analyst with Rafferty Capital Markets LLC, a New York brokerage firm. “The board of directors has gotten a clear vote of no confidence. It’s going to create a crisis for the management for Bank of America.”

Bank of America officials seem well aware of stakes.

Anne Finucane, a Lincoln resident who is global chief of strategy and a vice chairwoman of Bank of America, has been rallying support among the bank’s largest shareholders. One very prominent Bank of America investor, Warren Buffett, has spoken out in favor of Moynihan, crediting him last week with resuscitating the bank.

Former US representative Barney Frank, the Newton Democrat who crafted the post-financial crisis banking law that bears his name, has also backed Moynihan, doing a round of interviews during the past few days. Frank noted that the bank has settled federal charges over its mortgages and that Moynihan was one of the few top banking officials to publicly support the formation of a federal financial watchdog agency, the Consumer Financial Protection Bureau.

“He’s done a pretty good job,” Frank said. “He’s managed problems he has inherited.”

Other banks, including JP Morgan Chase & Co. of New York and Wells Fargo & Co. of San Francisco, have dual CEOs and chairmen, and no research suggests that splitting the roles improves performance, Moynihan supporters add. But several institutional investors, including the Massachusetts pension fund, plan to vote against combining the chairman and CEO roles.

The California public pension funds, the largest in the country, are telling shareholders that management needs stronger oversight from an independent chairman. The pension funds point to the bank’s poor financial performance and a $4 billion accounting error made last year.

The bank has also struggled with its Federal Reserve stress tests, earlier this year earning a warning from regulators about deficiencies in its ability to predict how it would perform in a severe downturn.

Bank of America’s share price closed at $16.33 Wednesday, a 4 percent increase from January 2010, when Moynihan took over. The stock fell 2.9 percent Thursday, to $15.86.

Meanwhile, the stock of its competitors has soared. Shares of Wells Fargo, the nation’s third-largest bank by assets, have nearly doubled in price during that period. The share price of JP Morgan Chase, the nation’s largest bank, has climbed almost 50 percent.

Aeisha Mastagni, portfolio manager for the California State Teachers’ Retirement System, said directors should hold Moynihan accountable for this performance.

“They need to make the decision who’s best positioned to lead Bank of America going forward,” Mastagni said. “Whether they win or lose, it’s going to be close. They’re going to have to reflect on that and what they need to do.”

Moynihan’s rise was somewhat circuitous. As a lawyer, one of his primary clients was Fleet Financial Group, which he advised on acquisitions that helped make Fleet the largest financial institution in New England. Fleet eventually hired Moynihan as deputy counsel and later put him in charge of the bank’s investment and wealth-management unit. Bank of America bought Fleet in 2004; Moynihan continued to lead the combined company’s wealth management operations and then consumer banking.

When former chief executive Ken Lewis abruptly retired following the disastrous acquisition of the mortgage lender Countrywide Financial Corp., the purchase of the investment company Merrill Lynch, and multiple investigations by state and federal authorities, the board turned to Moynihan. He took over as CEO of the sprawling bank in 2010, but by that time shareholders angry with Lewis had already separated the roles of chairman and CEO.

While managing the company — with headquarters in Charlotte, N.C. and a significant presence in New York — Moynihan has remained rooted in Wellesley. He still goes to the dump on the weekends, attends Mass, and on Thursday chaired a Boston gala to raise money for priests’ retirement and health care costs.

Under him, the bank has spent about $70 billion on fines, settlements, and legal costs and cut 15 percent of its employees and 20 percent of its branches and offices. His supporters say Moynihan spent the first two years of his tenure cleaning up past problems and putting the bank on firmer footing.

Deposits have grown by nearly 25 percent to $1.2 billion, and profits are up nearly 70 percent to $5.3 billion in the second quarter, from $3.1 billion in the same period in 2010.

“A simpler, straightforward business model is at the heart of the company’s turnaround since the financial crisis,” said Lawrence Grayson, a spokesman for Bank of America. “Our balance sheet has never been stronger.”

Greece's Alexis Tsipras has said his left-wing Syriza party has a "clear mandate" after winning a second general election in less than nine months.

But he said Greeks faced a difficult road and recovery from financial crisis would only come through hard work.

Syriza won just over 35%, slightly down on its previous result and still short of an overall majority.

But it will renew its coalition with the nationalist Independent Greeks. Opposition New Democracy gained 28%.

Far-right Golden Dawn came in third with 7%, slightly up on January's poll.

Syriza was first elected in January on an anti-austerity mandate, but was forced to accept tough conditions for Greece's third international bailout.

Sunday's snap election was called after Mr Tsipras lost his majority in August.

Some of his MPs who had opposed the new bailout conditions split to form a new party, but it has failed to get into parliament. Turnout was low.

It has been raining heavily in Athens, a drenching downpour that left one Greek observer looking at the skies, and wryly suggesting that the gods were angry at Sunday's election result.

And it is hard to avoid the suggested symbolism, not of heavenly wrath but of a country where the summer seems to have ended abruptly, and where the celebrations of Syriza supporters last night have now given way to the harsh reality their re-elected government must face.

It has agreed to tough austerity measures insisted on by the IMF and European Union, and now these must be implemented - cuts to pensions, rises in taxes and an end to some of the regulation and financial allowances that have kept many professions protected.

Farmers have already been readying their tractors for road blockades; some of the unemployed are contemplating their own protests. The new government's honeymoon will be a short one.

"I feel vindicated because the Greek people have a clear mandate to carry on fighting inside and outside our country to uphold the pride of our people," Mr Tsipras told supporters in Athens.

"In Europe today, Greece and the Greek people are synonymous with resistance and dignity.

Mr Tsipras was joined at the celebrations by Independent Greeks leader Panos Kammenos.

"Together we will continue the struggle we began seven months ago," Mr Tsipras said.

Among the challenges facing Mr Tsipras will be satisfying international creditors that Greece is meeting the terms of the latest bailout package worth up to €86bn ($97bn, £61bn). It involved more austerity for ordinary Greeks.

Creditors carry out a review in October and there is still some opposition from within Syriza.

The European Commission on Monday urged Syriza to press on with reforms.

"There is a lot of work ahead and no time to lose," spokesman Margaritis Schinas told reporters.

Jeroen Dijsselbloem, who heads the Eurogroup meetings of eurozone finance ministers, said he was "ready to work closely" with the new Greek government.

European Council President Donald Tusk said in a letter to Mr Tsipras that many of the biggest challenges facing the EU were the same as those facing Greece "including the refugee crisis and the creation of sustainable growth and jobs".

The Greek electoral system means the party with the largest number of votes wins a bonus of 50 seats - and Syriza will have 145 seats in the 300-seat parliament, only four fewer than in Mr Tsipras's January victory.

The Independent Greeks party, which is anti-austerity but agrees with Syriza on little else, won 10 seats. New Democracy won 75, Golden Dawn 18 (click on image).

Mr Tsipras won despite voters' rejection of austerity in a July referendum.
_______________________________

New government's priorities

• In first 100 days: Cut wage and pension costs again, but less than in previous five years (2% increase in workers' pension contributions, 2% increase in pensioners' national insurance contributions)
• Reform early retirement: Decide which categories will qualify for it (and revamp whole pension system before January)
• Recapitalise banks and set timetable for lifting capital controls
• Hold more talks on debt repayments with EU-IMF lenders, with goal of debt relief deal in January
• Adopt more tax reforms: farmers to see income tax double and fuel subsidy scrapped; new penalties for tax evasion (VAT increase was passed in July; corporation tax was raised by 3%, to 29%)
• Privatise more than half of state electricity network (regional airports and much of road network already privatised)
• Liberalise closed professions, eg removing taxi drivers' fixed tariffs
• Reinstate charges in state health service originally scrapped by Syriza (eg €5 charge for visit to doctor)

(Source: Dimitrios Syrrakos, Manchester Metropolitan University)

• Who exactly voted for Syriza?: The majority of Greeks voting for Syriza are the poor, unemployed (especially young unemployed), and civil servants looking to keep their jobs and benefits. Anyone employed in the private sector, running a business and is market oriented voted for New Democracy. 
• What did Tsipras gain from these elections?: A lot of Greeks bemoaned that these elections were a waste of money and unnecessary as the results didn't change much since the January elections. While this is true, they served a strategic purpose for Alexis Tsipras. He got rid of all the left-wing lunatics in his party and replaced them with moderates who will toe the party line. No more challenges from Lafazanis, Konstantopoulou and Varoufakis. They've all been "marginalized and neutralized" which is a good thing for Greece and Syriza (the former two didn't manage to garner 3% of the vote and Varoufakis didn't even bother running but he's still very active on Twitter and his blog, preparing for his next job or speaking engagement).
• Strange alliances will test coalition government?: Even though Syriza didn't get the majority of seats, the coalition with the right-wing Independent Greeks led by Panos Kammenos will be enough to form a majority government. The two parties are united only by their anti-austerity views but the truth is Kammenos is a political opportunist who would do anything to hold onto power. As we watched the election results in Montreal, my buddy almost heaved watching Tsipras embracing Kammenos (see picture above) : "It's like watching Donald Trump hugging Bernie Sanders. I can't believe what I'm seeing." I too wonder how long this honeymoon will last but knowing Kammenos's lust for power, I strongly doubt he will rock the boat.
• The creepy rise of Golden Dawn: One thing that concerns me is the creepy rise of the ultra nationalist Golden Dawn party. I'm sure the crisis with migrants contributed to this rise as Greece is ground zero for entry into Europe. Still, there's a growing backlash against immigrants in Greece which is very disconcerting and the Golden Dawn party is made up mostly of right-wing nuts who disrupt parliament every chance they get. If it were up to me, I'd outlaw this party and the Communist party and throw them all in jail for holding such warped right-wing and left-wing views (call me a fascist, I don't care, these fringe parties have to go!).
• Greeks are disenchanted: A lot of Greeks didn't even bother voting. In fact, 45% of the electorate didn't turn out to vote. You will see a few pictures of Syriza supporters dancing in the streets but don't be fooled, there's nothing to dance about. A friend of mine in Athens shared this with me: "The common Greek doesn't care. Low turnout at the ballot box. Was strolling in Athens last night right after Syriza was announced victorious and to my surprise nothing was going on, it was very quiet."
• It's all up to Tsipras now: My father who is vacationing in Crete made a good point when we talked on Sunday afternoon. "In a way this is good. Tsipras passed the last bailout so let him own it and implement it." 

It is all up to Alexis Tsipras now. The Greek leftist politician’s electoral triumph means no domestic forces can stop him implementing the country’s 86 billion euro bailout deal. The big question is whether the prime minister has the will and the competence to do so. If not, his victory could soon turn to disaster.

Tsipras secured a big win in the election held on Sept. 20. Despite breaking almost all the promises he made when he was first elected in January, he ended up with almost the same percentage of the vote and the same number of members of parliament. Tsipras’ old coalition partner, the right-wing Independent Greeks, also got back into parliament, with the result that he won’t need to bring in any new partners to form a new government. Together they will have about 155 MPs in the 300-seat parliament.

The Syriza leader’s victory is all the more impressive because it was achieved after pursuing a disastrous negotiating strategy with Greece’s euro zone creditors which resulted in the country’s banks being closed for three weeks and capital controls being imposed.

Tsipras also suffered a big split in his party, with a group of far-left MPs supported by Yanis Varoufakis, the firebrand former finance minister, forming their own party in protest at his agreement to the bailout’s terms. They fared so miserably in the election that they didn’t get back into parliament.

The splinter group’s failure is a cautionary tale that will strengthen Tsipras’ hand in his own party. Syriza still has lots of MPs who are unhappy about the bailout, which calls for Athens to combat an array of vested interests that have bedevilled the country for decades, cut social benefits and increase taxes. But these parliamentarians will be loath to rebel given that they now know it probably presages electoral oblivion.

What’s more, four of the six opposition parties – which collectively will have about 110 MPs – are in favour of the bailout. They will ensure that any votes needed as part of that agreement sail through parliament.

If Tsipras implements the deal, the upside is considerable. In return, Greece’s creditors will give it relief on its humongous debts; the European Central Bank will include the country’s debt in its quantitative easing programme, driving down its borrowing costs; and capital controls will be lifted rapidly. The recession-ridden economy could even start growing again by the middle of next year.

Unfortunately, there is a lot that can go wrong. For a start, Tsipras might listen too much to far-left factions within his party, even though he doesn’t need to. If so, he might drag his heels on implementing the programme.

A bigger risk, though, is that he just won’t be competent enough to govern. Many of the ministers in his first cabinet were not on top of their briefs and spent their time obstructing anything agreed with the creditors.

A repeat performance would be disastrous because Tsipras committed the country to a series of rapid-fire reforms. Having been disappointed so many times by Greek governments’ failure to deliver, the creditors insisted on a front-loaded programme with the bulk of the measures due by October.

Not only are many of the reforms, such as the revamp of the pension system, complicated. Athens is supposed to pass a supplementary budget next month that spells out the fiscal measures for the next three years.

The creditors will review whether Tsipras has delivered his side of the bargain. If he has, they will negotiate a debt relief deal.

The euro zone will also give Athens another dollop of bailout cash. The government will be able to use some of this to pay bills to suppliers that have been accumulating for months. The cash injection could more than counterbalance the extra austerity envisaged under the programme. The biggest chunk of bailout money, up to 25 billion euros, will be used to recapitalise Greece’s banks.

The October deadline is almost certain to slip. If this is just by a month or even two, that won’t matter too much.

But if Greece fails to receive a positive review by the end of the year, things could get serious. This is because from next year the euro zone’s new rules on bank recapitalisations kick in. Depending on how much extra capital Greek banks need, this could mean uninsured depositors have to be “bailed in” – with a portion of their savings forcibly converted into shares.

Such an outcome would be devastating for the economy, delivering another blow to confidence. The possibility of Greece being driven out of the euro, which has receded in the past two months, would return with a vengeance.

Tsipras knows all this. Hopefully, his election victory won’t go to his head. He needs to get cracking.

"Nothing will change. This vote is a disaster for Greece. The only industry bringing money into the country is tourism which remained strong this summer despite the crisis. Syriza's victory will freeze all major investments in Greece. Nothing is moving in terms of credit. Businesses are unable to secure loans and most aren't paying their existing loans. People aren't paying their rents. They took money out of the banks -- lots of money -- and are paying for essentials, but once this money runs out, all hell will break loose."

Lone Star Funds is seeking partners to invest 1 billion euros ($1.1 billion) in Vilamoura, a residential golf resort in Portugal’s Algarve region that’s more than eight times the size of Monaco.

The U.S. private-equity firm is teaming up with Vilamoura World to double the number of homes at the resort to about 10,000 within five years, according to Paul Taylor, chief executive officer of the Portuguese developer. They also plan to build as many as five hotels with about 4,000 rooms on the site, which already has five 18-hole golf courses and an 825-berth marina.

International home buyers are targeting Portugal after the government introduced measures which allow non-Europeans to live in Portugal in exchange for property investment of at least 500,000 euros. The program has raised 1.47 billion euros of investment since it began in 2012, according to APEMIP, Portugal’s Real Estate Professionals and Brokers Association.

“Due to the golden visa scheme, we are seeing a lot of interest from China, Brazil and even India,” Taylor said. He said a reduction in expatriate income tax to 20 percent from 48 percent is also attracting investors.

Economic Revival

Portugal’s economic revival, following a three-year bailout program that ended in May 2014, is also fueling demand for hotels and other commercial properties. Investment in Portuguese real estate totaled 972 million euros in the first half, according to data from CBRE Group Inc. That exceeded the 847 million euros that was invested in the whole of last year.

Lone Star bought Vilamoura from struggling Spanish savings bank Catalunya Banc and Algarvetur in March for an undisclosed amount. The resort, about a 20-minute drive from the international airport in the city of Faro, spans about 17 million square meters (183 million square feet). No one at Lone Star was available to comment.

“There is a real investor fever for residential golf resorts in southern Europe right now,” said Patricio Palomar, head of alternative investments at brokerage CBRE Group Inc. in Spain. “Investors have seen the risk profile of countries such as Portugal diminish as its economy improved and prices bottomed, its a good time to invest.”

The economic recovery in northern Europe, the traditional source of holiday makers to Portugal, will also boost demand for hotel rooms and holiday homes, Vilamoura World’s Taylor said. In 2014, Portugal attracted 16 million tourists, up 14 percent on the previous year, according to Portugal’s official tourism institute. Visitors to the Algarve totaled 3.6 million spending a total of 695 million euros, according to the organization.

The top real estate executive of Canada's second-largest pension fund said he won't have to make riskier investments to achieve his target of a 7 percent to 8 percent average annual return for the next decade.

Daniel Fournier, chief executive of Ivanhoe Cambridge, the real estate arm of Caisse de depot et placement du Quebec, said on Monday he won't have to take bigger risks as yields weaken, a strategy he saw many investors take before the global financial crash.

"I don't think the answer is to go way up the risk curve," he told reporters in Montreal.

Ivanhoe Cambridge, which owns C$48 billion ($36.22 billion) in assets, generated an average 13 percent return a year over the last five years, a target that is no longer "sustainable" as markets cool, Fournier said.

He said Ivanhoe Cambridge would continue to use the same strategy of striking a balance between higher yielding, opportunistic transactions and the purchase of quality properties that deliver stable but comparatively lower returns.

"It's the balance between the two that gave us the 13 percent over the last five years and where we're trying to produce the 7 or 8 percent that the Caisse is expecting from us," he said.

In January 2015, Ivanhoe Cambridge generated headlines for buying 3 Bryant Park in New York for $2.2 billion, a near-record price for an individual U.S. office building.

While commercial real estate prices have soared in global gateway cities like New York and London, Fournier said that unlike 2007 and 2008, he doesn't see any froth, or trend of overbuilding in U.S. markets that was prevalent in the run-up to the global crash.

Canadian pension fund manager Caisse de dépôt et placement du Québec said on Monday it has formed an investment platform with a group of leading Mexican institutional investors to put money into infrastructure opportunities in Mexico.

The new vehicle will invest C$2.8 billion ($2.1 billion) over the next five years in energy generation and distribution, along with investments in other areas like transportation and public transit, said the Quebec-based pension fund manager.

Caisse said it plans to commit some C$1.43 billion to the fund and retain a 51 percent stake in the investment vehicle. CKD IM will hold the remaining 49 percent.

The current shareholders of CKD IM are Mexican pension fund managers XXI Banorte, SURA, Banamex, Pensionissste and Infrastructure fund Fonadin. These pension fund managers together manage some 62 percent of Mexican pension fund assets, said Caisse.

"When we look around the world, especially in the infrastructure sector, Mexico stands out as an exceptional country to invest in," said Caisse Chief Executive Michael Sabia in a statement.

Caisse has been a major infrastructure investor for over 15 years. Its infrastructure portfolio is currently worth more than C$11 billion and includes investments in the Port of Brisbane, Heathrow Airport, Eurostar and Colonial Pipeline in the United States.

The pension fund manager has stated that it plans to double the size of this portfolio by 2018.

"We believe recent reforms in the energy and infrastructure sectors have opened the possibility of win-win partnerships that will benefit the whole Mexican economy," said Grupo Financiero Banorte CEO Marcos Ramirez Miguel in the joint statement issued by Caisse.

As part of the transaction announced Monday, CKD IM is also acquiring 49 percent of Caisse's equity investment in the ICA OVT venture, which currently owns four toll road concessions in Mexico.

Harvard is looking for investment managers with expertise as short-sellers, as the world's biggest university endowment becomes more cautious about the outlook for financial markets.

In its latest annual report, which showed investment returns fell to 5.8 per cent in the year to June, the $38 billion endowment said its managers had started to increase cash holdings and feared that some markets had become "frothy"."We are proceeding with caution in several areas of the portfolio," Harvard Management Company chief executive Stephen Blyth wrote in the report.

"We are being particularly discriminating about underwriting and return assumptions given current valuations.

"In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market."

Mr Blyth, a British-born statistician, was promoted to run the endowment last year after the resignation of Jane Mendillo, whose returns failed to keep pace with those at other Ivy League institutions.

Mr Blyth unveiled an overhaul of Harvard's asset allocation process which is likely to be examined widely among other institutions.

Endowments such as those at Harvard, and particularly Yale under its chief investment officer David Swensen, have been seen as pioneers in asset allocation and portfolio management theory.

Harvard is ditching its traditional approach of assessing the likely risk and return of each separate asset class and instead focusing on five key factors: the outlook for global equities, US Treasuries, currencies, inflation and high-yield credit.

The result is that Mr Blyth will be sharply scaling back the university's holdings of overseas equities, dialing up real estate and bond investments, and giving himself more flexibility.

He set out a new promise to beat inflation by 5 per cent a year over 10 years.

The 5.8 per cent gain for the Harvard endowment in the year to June 30 compared with 15.4 per cent the previous year, when global equity markets were rising more sharply.

Its $6 billion allocation to hedge funds also held back performance, returning only 0.1 per cent.

While disappointing hedge fund performance has led some big institutions, including the California public pension fund Calpers, to pull out of the sector all together, Harvard is understood to be happy with its hedge fund portfolio, which outperformed its benchmark in the five previous years.

The endowment's real estate portfolio was its top performing asset, up 19.4 per cent last year.

"Real estate markets provide dramatically cyclical returns.Looking in the rear-view mirror in the late 1980s, investors generated wild enthusiasm for real estate as historical statistics dominated numbers for traditional stocks and bonds. A few years later, after the market collapse, those same investors saw nothing other than dismal prospects for real estate. poor returns nearly eliminated interest in real estate as an institutional investment asset. Reality lies somewhere between the extremes of wild enthusiasm and despair."

The Harvard University Management Company, which oversees an endowment of $37.6 billion, the academic world’s largest, generated a 5.8 percent return for its most recent fiscal year, significantly lower than several of its rivals.

The return, for the year that ended June 30, beats the preliminary 5.6 percent figure that Cambridge Associates released as the average for endowments over $3 billion that it tracks.

Still, “the Harvard result was disappointing,” said Charles Skorina, owner of a company that recruits chief investment officers for endowments.

Mr. Skorina noted that Harvard had consistently underperformed its rivals over the last few years despite having one of the biggest and most expensive endowment offices.

While Harvard’s biggest rivals in the universe of large endowments — including Princeton and Yale — have yet to release their returns, several people in the endowment sector said that those schools were all expected to release results of well over 10 percent. The people spoke on the condition of anonymity.

Massachusetts Institute of Technology, for example, just reported a 13.2 percent return. Bowdoin College, a far smaller school with a $1.3 billion endowment, this week reported returns of 14.6 percent.

Still, results varied widely. The University of Texas Management, which has $26.6 billion to manage, reported that it had a weighted 3.5 percent return for its two funds.

Weak returns in the market are expected to depress investment performance at schools where portfolios are limited to stocks and bonds. But schools such as Harvard have access to a range of alternative investments such as private equity, hedge funds and real estate.

In the last fiscal year, private equity and real estate fared particularly well. Although Harvard did not disclose its asset allocation in its most recent report, it had roughly 20 percent of its assets in private equity in the 2014 fiscal year; Yale, by contrast, had about 33 percent of assets in that sector. Harvard’s decision not to provide its asset allocation numbers made it harder to evaluate the impact of allocation decisions on performance.

And although Harvard outperformed the internal benchmarks it sets for itself in all but the “absolute” or hedge fund category, the outperformance may not necessarily have been as impressive as those at other endowments. There were, however, some savvy moves, such as eliminating investment in commodity indexes when such investments were posting steep declines.

Endowment performance is crucial at all colleges because a portion of the returns are used to finance their annual budgets. Harvard relies on the endowment for roughly 35 percent of its yearly expenses.

Still the Harvard endowment’s leadership team has had a lot of turnover ever since Jack Meyer stepped down as its head in 2005. Harvard had — and continues to have — a strategy in which a portion of its money is managed internally and a portion is managed externally by investment firms including hedge funds. It is the only large university to use such an approach. Most endowment chiefs allocate the school’s funds to outside managers.

Before Mr. Meyer’s departure, some members of the Harvard faculty had complained that money managers who worked at the Harvard Management Company were paid enormous sums of money compared with academics. The negative publicity was said to be a factor in Mr. Meyer’s decision to leave, despite a stunning record. He was replaced first by Mohamed El-Erian who had been at Pimco. Mr. El-Erian left in 2007 to return to that firm.

He was followed by Jane Mendillo, who had once worked at Harvard and then ran the endowment for Wellesley College, but she quit in 2014 after returns proved disappointing.

She has since been replaced by Stephen Blyth, who was promoted to president and chief executive after many years at the endowment firm. Mr. Blyth had previously held posts as head of internal management and public markets.

In a long letter released with the performance figures, Mr. Blyth signaled that he intended to keep with Harvard’s history of managing some of its money internally, but he suggested that he would make changes.

For example, he wrote that he would aim to have his internal money managers work more closely with one another by tying their compensation not just to the assets each one managed but also how the endowment as a whole performed.

Still, Harvard may not pay the same sums as private firms, which could lead to difficulties in attracting and keeping talent.

Workers of the world are about to get their revenge. Owners of capital will have to make do with a shrinking slice of the cake.

The powerful social forces that have flooded the global economy with abundant labour for the past four decades years are reversing suddenly, spelling the end of the deflationary super-cycle and the era of zero interest rates.

"We are at a sharp inflexion point," says Charles Goodhart, a professor at the London School of Economics and a former top official at the Bank of England.

As cheap labour dries up and savings fall, real interest rates will climb from sub-zero levels back to their historic norm of 2.75pc to 3pc, or even higher.

The implications are ominous for long-term US Treasuries, Gilts or Bunds. The whole structure of the global bond market is a based on false anthropology.

Prof Goodhart says the coming era of labour scarcity will shift the balance of power from employers to workers, pushing up wages. It will roll back the corrosive inequality that has built up within countries across the globe.

If he is right, events will soon discredit the sweeping neo-Marxist claims of Thomas Piketty, the best-selling French economist who vaulted to stardom last year.

Mr Piketty's unlikely bestseller - Capital in the 21st Century - alleged that the return on capital outpaces the growth of the economy over time, leading ineluctably to greater concentrations of wealth in an unfettered market system. "Piketty was wrong," said Prof Goodhart.

What in reality happened is that the twin effects of plummeting birth rates and longer life spans from 1970 onwards led to a demographic "sweet spot", a one-off episode that temporarily distorted labour economics.

Prof Goodhart and Manoj Pradhan argue in a paper for Morgan Stanley that this was made even sweeter by the collapse of the Soviet Union and China's spectacular entry into the global trading system.

The working age cohort was 685m in the developed world in 1990. China and eastern Europe added a further 820m, more than doubling the work pool of the globalised market in the blink of an eye.

"It was the biggest 'positive labour shock' the world has ever seen. It is what led to 25 years of wage stagnation," said Prof Goodhart, speaking at a forum held by Lombard Street Research.

We all know what happened. Multinationals seized on the world's reserve army of cheap leader. Those American companies that did not relocate plant to China itself were able play off Chinese wages against US workers at home, exploiting "labour arbitrage". US corporate profits after tax are now 10pc of GDP, twice their historic average and a post-war high.

It was much the same story in Europe. Volkswagen openly threatened to shift production to Poland in 2004 unless German workers swallowed a wage freeze and longer hours, tantamount to a pay cut. IG Metall bowed bitterly to the inevitable.

Cheap labour held down global costs and prices. China compounded the effect with a factory blitz - on subsidised credit - that pushed investment to a world record 48pc of GDP and flooded markets with cheap goods - first clothes, shoes and furniture, and then steel, ships, chemicals, mobiles and solar panels.

Lulled by low consumer price inflation, central banks let rip with loose money - long before the Lehman crisis - leading to even lower real interest rates and asset bubbles. The rich got richer.

..

This era is now history. Wages in China are no longer cheap after rising at an average rate of 16pc for a decade.

The yuan is overvalued. It has appreciated 22pc in trade-weighted terms since mid-2012, when Japan kicked off Asia's currency war. Panasonic is switching production of microwaves from China back to Japan.

But the underlying causes of the deflationary era run deeper. The world fertility rate has steadily declined to 2.43 births per woman from 4.85 in 1970 , with a precipitous collapse over the past 20 years in east Asia.

The latest estimates are: India (2.5), France (2.1), US (two), UK (1.9), Brazil (1.8), Russia and Canada (1.6), China (1.55), Spain (1.5) Germany, Italy, and Japan (1.4), Poland (1.3) Korea (1.25), and Singapore (0.8). As a rule of thumb, it takes 2.1 to keep the population on an even keel.

The numbers of working-age rose sharply relative to children and - for a while - the elderly. The world dependency ratio dropped from 0.75 in 1970 to 0.5 last year. This was the sweet spot.

"We are on the cusp of a complete reversal. Labour will be in increasingly short supply. Companies have been making pots of money but life isn't going to be so cosy for them anymore," said Prof Goodhart.

The dependency ratio has already bottomed out in the rich countries. It is now rising far more quickly than it fell as baby boomers retire and people live much longer.

China will face a double hit, thanks to the legacy effects of the one-child policy. "They kept it going 15 years too long, disastrously," said Prof Goodhart. China's workforce is already shrinking by 3m a year.

It is widely assumed that the demographic crunch will pull the world deeper into deflation, chiefly because that is what has happened to Japan - probably for unique reasons - since it pioneered mass dotage 20 years ago.

The Goodhart paper makes the opposite case. Healthcare and ageing costs will drive fiscal expansion, while scarce labour will set off a bidding war for workers, all spiced by a state of latent social warfare between the generations. "We are going back to an inflationary world," he said.

China will no longer flood the world with excess savings. The elderly will have to draw down on their reserves. Companies will have to invest again in labour-saving technology, putting their great stash of idle money to work.

We will see a reversal of the forces that have pushed the world savings rate to a record 25pc of GDP and created a vast pool of capital spilling into asset booms everywhere, even as the global economy languishes in a trade depression.

The "equilibrium rate" of real interest will return to normal and we can all stop talking about "secular stagnation". Central banks can stop fretting about the horrors of life at the "zero lower bound" (ZLB), and they are certainly fretting right now.

The Bank of England's chief economist, Andrew Haldane, warned in a haunting speech last week that we may be stuck in a zero-interest trap for as far as the eye can see, with little left to fight the next downturn - typically requiring three to five percentage points of rate cuts to right the ship.

"Central banks may find themselves bumping up against the ZLB constraint on a recurrent basis," he said. His answer is a menu of quantitative easing so exotic it trumps Corbynomics for heterodoxy.

Professor Goodhart makes large assumptions. He doubts that robots will displace workers fast enough to offset the labour shortage, or that greying nations are culturally able to absorb enough immigrants to plug the jobs gap, or that India and Africa have the infrastructure to repeat the "China effect".

The world has never faced an ageing epidemic before so we are in uncharted waters. What is clear is that the near vertical take-off of the dependency ratio is about to shatter all our economic assumptions.

The last time Europe's serfs suddenly found themselves in huge demand was after the Black Death in the mid-14th century. They say it ended feudalism.

The advanced countries have fallen into the debt-deflation trap because they were unwilling to accept the political pain of real-sector restructuring, relying instead on financial engineering and loose monetary and fiscal policies. Here, China’s one-party system provides a clear advantage: the country’s leaders can take politically painful decisions without worrying about the next election. One hopes that they do.

Ontario Teachers’, the Canadian pension plan that owns the UK’s High Speed One railway and its National Lottery operator, is planning to expand further in London, tripling the size of its European investment team.

It revealed on Thursday that it aimed to grow its private equity arm by adding staff in infrastructure and in what it calls “relationship investing”— investing in public or nearly-public companies and working closely with the managers.

Teachers’, which has $160bn in assets, this month moved from Leconsfield House, MI5’s former haunt, into a bigger steel-and-glass building overlooking Marylebone’s leafy Portman Square.

Its expansion is expected to lead to further purchases in the UK, where it also owns Birmingham and Bristol airports.

“We own four airports, so why wouldn’t we look at London City Airport?,” says Jo Taylor, Teachers’ European head, highlighting one asset that is coming to the market. (Teachers also owns Brussels and Copenhagen airports.)

“If an asset like London City became available, or an asset like HS2 [HS1’s potential successor] became available for funding, clearly we would be interested,” he adds.

Ontario Teachers’ is one of a rare breed of pension fund investors — many of them Canadian — that are using in-house teams to find and buy assets independently, or alongside buyout firms, as well as paying fees to traditional third-party funds.

They are increasingly seen by some buyout managers as rivals in a market where prices are high and deals scarce.

“They’re the poster boy, the role model if you like, for increasingly active investors in private equity,” says Stephen Gillespie, a partner at Gibson Dunn.

Mr Taylor, a veteran of 3i, the British buyout firm, prefers to talk about partnership.

Expanding in London, in a timezone where the fund can quickly give feedback on investment offers, provides “the ability for us to develop strategic relationships for the plan over the long term”, he says. “Teachers’ is very much focused on partnering.”

Last year it invested in CSC, a coin-operated laundry machine company owned by Pamplona Capital Management. Last week it continued the relationship, buying a stake in Pamplona’s OGF, France’s biggest operator of funeral parlours.

The nature of these businesses — unglamorous, but with inflation-busting cash flows — is not the private equity norm.

Part of the reason Teachers’ has become a large investor in infrastructure — typically a long-term investment — is that its private market returns have to protect future payouts to its more than 300,000 pension members. Public-sector pension plans must be fully-funded under Canadian law. (LK: this is false, only true in the Netherlands)

Ron Mock, chief executive, says the UK is the “model that the rest of the world follows” on infrastructure investment policy.

“It’s about clarity of outcome, it’s the regulatory environment,” he adds. “There’s not a lot of, or hardly any, renegotiation after a deal is done.”

But in both infrastructure and private equity, asset prices are high, as capital is flooding into what are inherently scarce assets from low-yielding public markets.

In buyouts, some question whether Teachers’ edge is simply overpaying and reducing its future returns.

Teachers’ view is that it takes a different perspective to traditional private equity firms by holding investments for the longer term.

Private equity firms can often own businesses for half a decade or more — but the limited lives of funds means they have to sell within a set period.

The nature of leverage, used to juice returns, can also make funds unwilling to inject more capital after the first investment.

“We can provide multiple subsequent rounds of capital,” Mr Taylor says. “We can hold an asset for seven, 10, 12 years . . . we look at these projects with a conservative approach. We’re more likely to apply lower levels of debt.”

In terms of Teachers’ returns, Mr Taylor says the fund has a 24-year record in private equity of 20 per cent net returns.

There is some academic evidence to back this up. In 2014 a Harvard Business School paper found ‘solo’ direct investments in private equity by seven anonymous large institutional investors returned more than public markets between 1991 and 2011.

Although these deals fared better than co-investing in companies alongside private equity managers, their outperformance versus investing in buyout funds was more mixed.

“While direct investments consistently outperform the market, they do not regularly outperform other private equity investments,” the paper argued.

Bill Gross is literally laughing at the stock market.

In a tweet on Tuesday morning, Janus Capital's Bill Gross said: "Stock market refrain from a few months ago: "Where else are you gonna put your money?" LOL ... Ever considered cash?"

Put another way, Gross is laughing at people who invested in the stock market because there was nothing else to invest in.

Folks who have been reading Gross' investment updates over the past year or so most likely know that Gross would prefer holding cash to being invested in the stock market — or almost anything else.

Early in September, Gross' monthly missive basically said everything sucked.

Gross wrote:

Global fiscal (and monetary) policy is not now constructive nor growth enhancing, nor is it likely to be. If that be the case, then equity market capital gains and future returns are likely to be limited if not downward sloping. High quality global bond markets offer little reward relative to durational risk. Private equity and hedge related returns cannot long prosper if global growth remains anemic. Cash or better yet "near cash" such as 1-2 year corporate bonds are my best idea of appropriate risks/reward investments. The reward is not much, but as Will Rogers once said during the Great Depression – "I'm not so much concerned about the return on my money as the return of my money."

Early Tuesday, stocks were falling after getting crushed on Monday.

The US economy added 142,000 jobs in September, fewer than forecast.

Economists had been expecting the economy to add 200,000 jobs.

The unemployment rate held steady at 5.1%, a seven-year low.

Average hourly earnings were flat month-over-month in September, below expectations for 0.2% growth.

Ahead of this report, economists had noted that August and September nonfarm payrolls prints had been revised higher most of the time over the past decade. The August print, however, was revised lower to 136,000 from 173,000 in Friday's report.

Economists had noted that the broad-based slowdown in the manufacturing sector, partly because of the strong dollar and slower exports, would most likely show up in this report. Manufacturing employment fell 9,000 in September, versus expectations for no change.

Mining employment also fell, as healthcare and information added more jobs, according to the Labor Department.

The labor-force participation rate, which measures the share of Americans over 16 who are working or looking for a job, fell to 62.4%, the lowest since October 1977.

The year-over-year projection for hourly earnings growth, at 2.4%, was the most bullish forecast for wages in this economic cycle. Wages missed, at 2.2%.

In September, the Federal Reserve held off on raising its benchmark rate for the first time in a decade, citing global growth concerns and a labor market that needed further improvement. After the jobs report, Fed fund futures reflected only a 30% chance that the Fed would lift rates in December and a 52% probability for March.

Stock futures nosedived after the report — all three major indexes lost more than 1%, and Dow futures shed as many as 200 points. The yield on the 10-year benchmark Treasury note fell below 2% for the first time since the market sell-off on August 24.

Here's what Wall Street was expecting for the jobs report:

• Nonfarm payrolls:+200,000
• Unemployment rate: 5.1%
• Average hourly earnings, month-over-month: +0.2%
• Average hourly earnings, year-over-year: +2.4%
• Average weekly hours worked: 34.6

For the first time in nearly a decade, the Federal Reserve is considering raising its target interest rate, which would end a long period of near-zero rates. Like the cessation of large-scale asset purchases in October 2014, that action will be an important milestone in the unwinding of extraordinary monetary policies, adopted during my tenure as Fed chairman, to help the economy recover from a historic financial crisis. As such, it’s a good time to evaluate the results of those measures, and to consider where policy makers should go from here.

To begin, it’s essential to be clear on what monetary policy can and cannot achieve. Fed critics sometimes argue that you can’t “print your way to prosperity,” and I agree, at least on one level. The Fed has little or no control over long-term economic fundamentals—the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.

What the Fed can do is two things: First, by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce. High unemployment is a tragedy for the jobless, but it is also costly for taxpayers, investors and anyone interested in the health of the economy. Second, by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future. Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world.

How has monetary policy scored on these two criteria? Reasonable people can disagree on whether the economy is at full employment. The 5.1% headline unemployment rate would suggest that the labor market is close to normal. Other indicators—the relatively low labor-force participation rate, the apparent lack of wage pressures, for example—indicate that there is some distance left to go.

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

On the inflation front, various measures suggest that underlying inflation is around 1.5%. That is somewhat below the 2% target, a situation the Fed needs to remedy. But if there is a problem with inflation, it isn’t the one expected by the Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices. None of that has happened.

It is instructive to compare recent U.S. economic performance with that of Europe, a major industrialized economy of similar size. There are many differences between the U.S. and Europe, but a critical one is that Europe’s economic orthodoxy has until recently largely blocked the use of monetary or fiscal policy to aid recovery. Economic philosophy, not feasibility, is the constraint: Greece might have limited options, but Germany and several other countries don’t. And the European Central Bank has broader monetary powers than the Fed does.

Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its precrisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance. In November 2010, when the Fed undertook its second round of quantitative easing, German Finance Minister Wolfgang Schäuble reportedly called the action “clueless.” At the time, the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.

Six years after the Fed, the ECB has begun an aggressive program of quantitative easing, and European fiscal policy has become less restrictive. Given those policy shifts, it isn’t surprising that the European outlook appears to be improving, though it will take years to recover the growth lost over the past few years. Meanwhile, the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.

It is encouraging to see that the U.S. economy is approaching full employment with low inflation, the goals for which the Fed has been striving. That certainly doesn’t mean all is well. Jobs are being created, but overall growth is modest, reflecting subpar gains in productivity and slow labor-force growth, among other factors. The benefits of growth aren’t shared equally, and as a result many Americans have seen little improvement in living standards. These, unfortunately, aren’t problems that the Fed has the power to alleviate.

With full employment in sight, further economic growth will have to come from the supply side, primarily from increases in productivity. That means that the Fed will continue to do what it can, but monetary policy can no longer be the only game in town. Fiscal-policy makers in Congress need to step up.As a country, we need to do more to improve worker skills, foster capital investment and support research and development. Monetary policy can accomplish a lot, but, as I often said as Fed chairman, it is no panacea. New efforts both inside and outside government will be essential to sustaining U.S. growth.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank would have been “totally justified” if it had increased policy stimulus to combat low inflation when it met last month, adding that negative interest rates could be a useful policy tool.

Speaking in an interview Sept. 29 with Arthur Levitt on Bloomberg Radio, the Fed’s most outspoken policy dove declined to say if he had recommended negative interest rates in projections submitted for the Sept. 16-17 meeting of the Federal Open Market Committee. He did say, however, that more aggressive Fed policy was warranted than the current setting of near-zero rates.

“Given the inflation outlook, given how low inflation is expected to be, to ensure the credibility of our inflation target, taking a more accommodative stance in September would have been totally justified,” Kocherlakota said in the interview, broadcast Saturday. He steps down from the Fed on Dec. 31 and is not a voting member of the FOMC this year.

The FOMC decided last month to hold rates near zero, though Chair Janet Yellen said Sept. 24 that she expected that the central bank’s first rate increase since 2006 would be warranted later this year. Kocherlakota has repeatedly argued for a delay in rate liftoff.

Accommodation Time

“My main point -- this is a time to think about adding accommodation, not a time to be thinking about taking it away,” he said.

Policy makers submit quarterly economic forecasts including their projections for the appropriate future path of the federal funds rate, which has been held near zero since December 2008. Displayed as dots on a chart, forecasts on the so-called “dot-plot” released Sept. 17 showed that one official viewed the appropriate rate at the end of this year and next to be slightly less than zero.

Kocherlakota said he was prevented by the Fed’s rules of confidentially from disclosing if this was his dot, though he expressed interest in the decision of central banks in Sweden and Switzerland to drive rates below zero.

“I think it’s another useful tool in our toolkit that we should be surely thinking about,” he said, in response to the question of whether the Fed should consider doing likewise if officials decided there was a need to stimulate the economy more aggressively.

“It’s been very interesting what the European central banks have been able to do in terms of actually provide more stimulus than I would have expected, by driving interest rates below what economists used to call the zero lower bound,” Kocherlakota said.

Yellen was asked about the negative dot in the Fed’s Summary of Economic Projections during a post-FOMC press conference on Sept. 17. She said “negative interest rates was not something that we considered very seriously at all today.”

The second-largest US public pension fund has admitted it has failed to record total payments made to its private equity managers over a period of 27 years.

The admission by Calstrs, the $191bn California-based pension fund, prompted John Chiang, the state treasurer of California, to declare he will investigate the failure, which poses serious questions as to how pension fund money is being spent.

The news comes a week after FTfm reported that the state treasurer had voiced “great concern” that fellow pension fund Calpers, the US’s largest at $300bn, also has no idea how much it pays its private equity managers.

Mr Chiang said he would demand clear answers from Calpers over why it does not know how much has been paid in “carried interest” or investment profits over a period of 25 years to the private equity managers running its assets.

A spokesman for Calstrs, which helps finance the retirement plans of teachers, said the fund does not record carried interest. “What matters is the overall performance of the portfolio.”

Following questions from FTfm, Mr Chiang said he would demand Calstrs look into payments of carried interest to its private equity managers.

“Disclosure [of carried interest fees] is very important,” said Mr Chiang, who sits on the administration board of both Calstrs and Calpers.

The revelations come just weeks after US regulators issued an explicit warning to the private equity industry to expect more fines for overcharging investors. 

Calpers, which uses more than 100 private equity firms, identified a need to track fees and carried interest better in 2011, but it has taken until now to develop a new reporting system for its $30.5bn private equity portfolio.

But Calstrs, which manages a $19.3bn private equity portfolio and has 880,000 members, said it has no plans to upgrade its systems for tracking and reporting payments to private equity managers.

Margot Wirth, director of private equity at Calstrs, said it used “rigorous checks” to ensure private equity managers took the right amount of carried interest.

All of Calstrs’ partnerships with private equity managers were independently audited, Ms Wirth added. She said the pension fund carried out its own internal audits and employed a specialist “deep dive” team to look at private equity contracts.

Professor Ludovic Phalippou, a finance professor at the University of Oxford Saïd Business School, who specialises in private equity, told FTfm last week: “Calpers’ total bill is likely to be astronomical. People will choke when they see the true number.”

Prof Phalippou said the same would be true of Calstrs, which first invested in private equity in 1998.

Ms Wirth argued it was “wrong to conflate the fees paid to private equity managers with carried interest”.

She said: “Carried interest is a profit split between the investor and the private equity manager. The higher that carried interest is, then the better both the investor and private equity manager have performed.”

The fear is that if sophisticated investors such as Calpers and Calstrs faced difficulties in obtaining accurate information, then it could only be harder for smaller pension funds, endowments and wealth managers that are less well resourced.

David Neal, managing director of the Future Fund, Australia’s A$128bn sovereign wealth fund and one of the world’s largest investors in private equity, said: “There just are not enough decent private equity managers around to justify the fees.”

He added: “We negotiate fee arrangements that transparently reward genuine performance and drive alignment of interest. Where managers cannot meet those expectations, we do not invest. While we work hard at the arrangements with our managers, the industry still has some way to go.”

The staff and board members of California public pension fund CalSTRS continue to embarrass themselves in their efforts to justify their indefensible position on private equity carry fees.

Readers may recall that the biggest public pension fund, CalPERS, had a put-foot-in-mouth-and-chew incident when it said it didn’t track the profits interest more commonly called “carry fees,” which is one of the biggest charges it incurs on its private equity investments. CalPERS added to the damage by falsely claiming that no investors could get that information. After we broke that story and a host of experts and media outlets criticized CalPERS over the lapse and the misrepresentation, CalPERS reversed itself. It asked its general partners for all the carry fee data for the entire history of all of its funds, and obtained it all in a mere two weeks, with only one exception out of the nearly 900 funds in which it has invested.

So what has the second biggest public pension fund, CalSTRS, done? Like CalPERS, it has admitted that it does not track carry fees. But in a remarkable contrast, CalSTRS is attempting to justify inaction by misleading beneficiaries as to how much information it really has and saying that it’s thinking really hard about what (if anything) to do.

The dishonesty of the CalSTRS position is evident in its e-mails with the Financial Times after the pink paper reported that CalSTRS, like CalPERS, did not track carry fees, and California Treasurer John Chiang, who sits on both the CalPERS and CalSTRS boards, said he would press CalSTRS to look into the matter. I became aware of the contretemps when an FT reporter called me to thank me for my work. I asked him how CalSTRS was taking his story. He said they weren’t happy with it and they’d offered CalSTRS the opportunity to publish an op-ed, which was running early the following week. When I failed to see any such article, I contacted the reporter, who said his editor had rejected the article. I then lodged a Public Records Act request (California-speak for FOIA) for the op-ed and all e-mails between CalSTRS and the Financial Times from the date the Financial Times ran the article on CalSTRS’ carry fee tracking.

It’s important to remember that CalSTRS had said, flatly, that it does not know what it pays in carry fees. From the Sacramento Bee on July 2:

Ricardo Duran, a spokesman for the California State Teachers’ Retirement System, said CalSTRS can estimate the fees “within a couple of percentage points” but doesn’t report the figure.

“It’s not a number that we track,” Duran said. “It’s not that important to us as a measure of performance.”

Memo to CalSTRS: if you are estimating, you don’t know for sure.*

After the Financial Times ran its CalSTRS story, Ricardo Duran, CalSTRS’ head of communications, sent a clearly-annoyed e-mail to the Financial Times’ Chris Flood. Duran tried objecting that the so-called carry fee was not a fee because….drumroll..it was not paid directly by CalSTRS to general partners:

The following paragraph talks about [California Treasurer and CalSTRS board member] Mr. Chiang’s demand of CalPERS about how much has been “paid in carried interest.” Carried interest is not a payment but a profit split. I believe [head of private equity] Margot [Wirth] mentioned that distinction as well.

The language throughout the piece conflated carried interest with management/manager fees. That’s fine if that’s the way you want to characterize it. I only ask if you write about CalSTRS and carried interest again, you specifically mention this and attribute it to me or Margot.

So get a load of this: CalSTRS demanding that if the FT ever dare report on CalSTRS’ carry fee reporting again, that it include the staff’s pet position that a carry fee is not a fee, even when that contradicts statements by board members who oversee CalSTRS. Since when do mere employees a California agency have the right to undercut on-the-record statements of top California government officials?

And that’s before you get to the fact that this “carry fee is not a fee” position is bogus. As Eileen Appelbaum, the co-author of Private Equity at Work, wrote:

The email exchange in which CalSTERS argues with the Financial Times over the question of when is a fee not a fee has a certain Alice in Wonderland quality. The CalSTRS representative insists that a fee is not a fee if it takes the form of profit sharing. But profit sharing is clearly a performance fee – a fee paid to the PE investment manager based on the performance of the PE fund.

And as an expert who has been writing about private equity fees for decades said:

Private equity general partners put up around 1% of the money in a fund once you back out management fee waivers. They get 20% of the profits. The part over and above their pro-rata share is clearly a fee. As we lawyers like to say, res ipsa loquitur.

But the best part is Duran’s wounded claim that the FT “conflated” interest with management fees, as if that were inaccurate. This is from the very first limited partnership agreement I looked at from our document trove, KKR’s 2006 fund:

The Partnership will not invest in investment funds sponsored by, and as to which a management fee or carried interest is payable to, any Person….

Gee, KKR says in its own agreement that carried interest is indeed “paid” just like management fees!

But this is all a warm-up to the op-ed that the chairman of CalSTRS’ board, Harry Keiley, submitted to the Financial Times. It’s troubling to see a board chairman defend staff’s delaying tactics after another board member has demanded answers.

Other public pension fund trustees thought the odds were high that the article was either originally drafted by staff or had staff input. If staff did indeed provide text that Keiley assented to have run under his name, that has the effect of committing him to their position, even if he was privately not fully aligned with them.**

Moreover, it is peculiar to have a defense of CalSTRS’ position on carry fees come from someone who is almost certain never to have seen a private equity fund’s financial statements or reviewed the language in limited partnership agreements that describe the distribution “waterfall,” as opposed to the officers who are responsible and who presumably have expertise.

The full text of Keiley’s submission is at the end of this post. Here are the telling parts (emphasis ours):

We at CalSTRS are in favor of more, rather than less, transparency and disclosure as our history and current checks and balances show. We agree that it’s important for the public to know the estimated amount of carried interest investment managers are earning, tracked as net profits, which a majority of public pension plans report. Almost all private equity partnerships split profits, with the investor (e.g. CalSTRS) taking at least 80 percent and, at most, 20 percent taken by investment managers. Typically, a partnership must earn a minimum of 8 percent return for its limited partners (e.g. investors) before an investment manager earns any carried interest. Also, there are several large, publicly-owned private equity investment managers that report their earnings to delineate their carried interest income. I am confident that the CalSTRS board will continue to examine the issue of reporting carried interest in the context of its overall private equity disclosure practices to ensure we are taking all necessary steps to have full awareness and understanding of both fee and profit structures.

The boldfaced section is simply wrong. At best, it’s a laughably inept effort to mislead the audiences CalSTRS is most concerned about: its beneficiaries and California legislators. Net profits to investors like CalSTRS are after carry fees have been taken by the general partner. Tracking net profits tells you absolutely nothing about carry fees. And Keiley effectively admits that in the next paragraph:

Within our private equity program, we have always reported our returns net of all costs and fees.

From Eileen Appelbaum via e-mail (emphasis original):

What strikes me in the CalSTRS op-ed and their correspondence with the Financial Times is the complete lack of consistency in what CalSTRS’ board is saying. Mr. Keiley, Board Chair of CalSTRS, says that the pension fund agrees that it is important for the public to know what the pension fund pays to its investment fund managers. He finishes that sentence, however, by saying that CalSTRS fulfills that obligation by tracking and reporting net profits. I don’t know what subject Mr. Keiley teaches, but is it possible that he doesn’t understand that this is the crux of the matter? Tracking net profits is not the same as tracking all fees, expenses and carried interest the pension fund pays to private equity managers.

After trumpeting CalSTRS commitment to transparency, Mr. Keiley goes on to baldly contradict himself by asserting: “Within our private equity program, we have always reported our returns net of all costs and fees.” If Mr. Keiley is to be believed, the problem is not that private equity firms don’t provide information on the amount of carried interest they collect; indeed, he asserts that they “keep investors [like CalSTERS] fully informed as to the carried interest shared with their investment managers.” Astoundingly, one is left to draw the conclusion that CalSTRS has that information but chooses not to share it with California’s taxpayers and teachers.

Remember, as we stressed with CalPERS, California taxpayers are ultimately on the hook for public pension fund shortfalls. CalSTRS’ double-speak about transparency and its tracking of carry fees reveals that staff and a complaint board are more worried about keeping relations with limited partners friction-free rather than putting the interests of their beneficiaries, Calfornia schoolteachers, first.

I encourage you to send this post to people you know in California, particularly public school teachers. Urge them to e-mail Keiley to give him feedback on the terrible arguments he presented. Tell him that CalSTRS has no excuse for dragging its feet on obtaining carry fee data given that CalPERS has done just that. It would also help to tell him that it does not reflect well on him or the board to mislead the public, as he intended to do had the Financial Times not saved him from himself.

Given the e-mail address, I am highly confident that this contact information (p. 11) is indeed Keiley’s. I request that you NOT call him unless he fails to respond to an e-mail after two attempts.

Harry Keiley
Board Chair, CalSTRS
Mobile Phone: (310) 428 3624
Email: hkcalstrs@aol.com

Thomas Jefferson said, “When government fears the people, there is liberty.” There’s clearly no fear at CalSTRS. I hope you instill some.

____
* Many private equity funds actually do disclose their carry fee payments in their quarterly distribution notices, so in those cases, CalSTRS would have good data. But CalSTRS uses the same private equity management system that CalPERS does, State Street’s Private Edge. Private Edge does not have a field for recording carry fees. One of CalPERS’ excuses for not capturing carry fees was that it didn’t have a system for doing so, as if it would be too difficult to keep it in a speaadsheet in Excel.
** There is a considerable body of research that shows that people become persuaded of a point of view they advocate, irrespective of whether they originally believed it or not. For instance, trial lawyers who represent clients they strongly suspect are guilty come to believe they may be or even are innocent as they develop arguments supporting a “not guilty’ plea.

______

By Harry M. Keiley,

Mr. Keiley is the chair of the Teachers’ Retirement Board, the governing body of the California State Teachers’ Retirement System. Mr. Keiley is a high school teacher with the Santa Monica-Malibu Unified School District, and was elected to the Teachers’ Retirement Board in 2007.

With assets of $191.4 billion and nearly 880,000 members, the California State Teachers’ Retirement System (CalSTRS) is the largest public pension plan in the world dedicated solely to serving educators.

In addition to being one of the largest public pension plans, CalSTRS has one of the most comprehensive private equity programs globally. Begun in 1988, the current market value of our private equity portfolio is $19.3 billion. Since inception, our private equity program has generated over $21.8 billion in profits for the benefit of our members.CalSTRS’ highest returning asset class, private equity has returned on average 12.3 percent per year over the last ten years – well above the plan’s overall ten-year average of 6.8 percent and that of broad-based stock indices which averaged approximately 8.2 percent. Given its healthy performance over the past decade, the private equity program has also played an important role in the total CalSTRS portfolio by contributing excess returns above our long-term earnings assumption of 7.5 percent, thereby having a positive impact on the system’s overall funding.

We at CalSTRS are in favor of more, rather than less, transparency and disclosure as our history and current checks and balances show. We agree that it’s important for the public to know the estimated amount of carried interest investment managers are earning, tracked as net profits, which a majority of public pension plans report. Almost all private equity partnerships split profits, with the investor (e.g. CalSTRS) taking at least 80 percent and, at most, 20 percent taken by investment managers. Typically, a partnership must earn a minimum of 8 percent return for its limited partners (e.g. investors) before an investment manager earns any carried interest. Also, there are several large, publicly-owned private equity investment managers that report their earnings to delineate their carried interest income. I am confident that the CalSTRS board will continue to examine the issue of reporting carried interest in the context of its overall private equity disclosure practices to ensure we are taking all necessary steps to have full awareness and understanding of both fee and profit structures.

In addition to a commitment to transparency, CalSTRS also places utmost importance on internal control measures and prudent audit practices and, as such, our private equity program adheres to U.S. Government Accounting Standards Board (GASB) standards and General Accepted Accounting Principles (GAAP). Additionally, all cash flowing into and out of the CalSTRS private equity portfolio is accounted for and certified by annual independent audits. Within our private equity program, we have always reported our returns net of all costs and fees. In all cases, CalSTRS receives and regularly reviews independently audited financial statements of its private equity partnerships. It is important to note that, many times, details of those private equity partnerships are confidential due to the agreements signed by the various investors which are funding the limited partnership. However, as referenced above, capital investors involved in limited partnerships are provided with audited financial statements that disclose carried interest distributions made by the partnerships to the investment managers. As such, there is an established system of strong checks and balances to keep investors fully informed as to the carried interest shared with their investment managers.

CalSTRS has been, and continues to be, a leader in the private equity industry. Bringing innovation and diversity to our overall investment portfolio, the CalSTRS private equity program is a leader in transparency and disclosure, and acts as a fierce defender of investor rights when negotiating partnership agreements. CalSTRS is steadfastly committed to reviewing all of the checks and balances outlined above to see if we can improve upon our long track record of transparency and accountability in our disclosure practices. And, we will continue to apply our high standards, expectations, and drive for results to our ongoing and new investment partnerships in an effort to reach and exceed our private equity performance benchmarks.

A prominent Teamsters pension fund, one of the largest, has filed for reorganization under a new federal law and has sent letters to more than 400,000 members warning that their benefits must be cut.

Any reorganization of the decades-old Central States Pension Fund would take months and would probably be a brutal battle as workers, retirees, union leaders and employers all seek to protect competing interests. It is a multiemployer plan, the type led jointly by a union and a number of companies, that has caused consternation for many years, because if it failed, it could wipe out a federal insurance program that now pays the benefits of a million retirees.

If the reorganization ultimately proves successful, however, it could serve as a model for other retirement plans with similar, seemingly intractable financial problems.

Cutting retirees’ pensions has generally been illegal, except under the most dire circumstances. But the executive director of the Central States fund, Thomas Nyhan, said that reducing payouts to make the money last longer was the only realistic way of avoiding a devastating collapse in the next few years.

“What we’re asking is to let us tap the brakes a little now, and let us avoid insolvency,” he said. “The longer we wait to act, the larger the benefit reductions will have to be.”

He said the Central States fund had been hit by powerful outside forces — the deregulation of the trucking industry, declining union membership, two big stock crashes and the aging of the population — and it was currently paying out $3.46 in pension benefits to retirees for every dollar it received in employer contributions.

“That math will never work,” Mr. Nyhan said. He said the fund was projected to run out of money in 10 to 15 years, an almost unthinkable outcome for a pension fund that became a political and financial powerhouse in the 1960s, when trucking boomed with the construction of the interstate highway system. Central States became famous back then for financing the construction of hotels and casinos in Las Vegas.

In 1982, the Teamsters were barred from investing their retirees’ money because of the union’s ties to organized crime. Under a federal consent decree, the fund’s investment duties were shifted to a group of large banks, where they have remained. The restructuring plan would not change that.

In the coming months, the Treasury Department will review the Central States restructuring plan, to make sure it complies with the new law. It will also receive comments from affected people through a special master, Kenneth Feinberg, who has been retained by the Treasury to iron out conflicts that have come up in other special circumstances, such as the dispute over whether workers at bailed-out companies could receive contractual bonuses.

The Treasury is expected to decide whether to approve the proposal by next May. If it does, Central States’ roughly 407,000 members will then vote on it. Those facing large cuts would be unlikely to vote in favor of the restructuring. But others might see it as an acceptable way to make their pension plan viable over the long term. Active workers will continue to accrue benefits, for example, and Mr. Nyhan said his projections showed that the restructuring could make the pension fund last for 50 more years.

Mr. Nyhan acknowledged that the process would be emotionally charged. Even if a majority votes no, however, the Treasury Department will have legal authority to impose the changes, because the Central States fund is so large that it qualifies as “systemically important.” That means that if it collapsed, it could take down the multiemployer wing of the Pension Benefit Guaranty Corporation, jeopardizing the roughly one million retirees who currently get their pensions through the program. (The federal insurance program for single-employer pensions would not be affected by a possible failure of the multiemployer program.)

In the past, multiemployer pension plans were popular because they gave small companies the chance to offer traditional pensions, and they permitted workers to move from job to job, taking their benefits with them. About 10 million Americans participate in multiemployer pension plans, many of them in sectors like trucking, construction and retailing, where unions are a powerful presence.

Such pension plans were also said to be financially stronger than single-employer pension plans, because if one company went out of business, others would keep contributing to the pooled trust fund that paid the benefits. Both types were insured by the federal government’s pension insurance program, but companies taking part in multiemployer plans paid much smaller premiums and the coverage was very limited — no more than $12,870 per year, compared to around $54,120 a year for a single-employer pension.

Many Teamsters have earned pensions that exceed the multiemployer insurance limit and would be hit hard if the Central States fund failed.

But in recent years, some multiemployer plans ran into severe trouble as more and more participating companies went bankrupt, leaving growing numbers of “orphaned” workers and retirees for the surviving companies in the pool to cover. Companies in the more troubled plans said lenders would no longer give them credit. Last December, Congress enacted the Multiemployer Pension Reform Act of 2014, which set up a legal framework for distressed pension plans to restructure.

According to a summary provided by the Central States pension fund, its restructuring plan would work by slowing the rate at which active Teamsters will build up their benefits in the coming years, and by lowering the payouts to current retirees, with certain exceptions.

Retirees who are 80 or older will not have their pensions cut, and those over 75 will receive smaller cuts than younger retirees. Disability pensions will continue to be paid in full.

A group of about 48,000 workers and retirees who earned their benefits by working at United Parcel Service will continue to have their pensions paid in full, thanks to labor contracts between the Teamsters and the company. UPS was for many years the largest employer in the Central States pension fund, but it withdrew from the fund in December 2007 after making one large final payment. After the stock market crash the following year, UPS and the Teamsters negotiated a separate agreement calling for UPS to shelter those workers from any cuts the Central States pension fund might have to make.

The group that seems exposed to the largest pension cuts consists of about 43,400 “orphans,” or retirees still in the pension fund, even though their former employers no longer exist. Their pensions will be cut to 110 percent of what they would get from the Pension Benefit Guaranty Corporation, or at most, $14,158.

Active workers will not lose any of the benefits they have earned up until now. But in their coming years of work, they will accrue benefits at the rate of 0.75 percent of the contributions their employers pay into the fund. In the past, their accrual rate was 1 percent.

The restructuring will also abolish a rule that bars pensioners from returning to the work force to supplement their reduced pensions.

The president of the International Brotherhood of Teamsters, James P. Hoffa, wrote to Mr. Nyhan last month, saying the new restructuring law “creates the false illusion of participatory democracy,” because it required a vote “that can simply be ignored.” Although Mr. Hoffa is president of the union, he has no say over the pension fund, which is run by a group of trustees from the companies and the union.

“Participants and beneficiaries get to vote, but their vote only counts if they vote to cut their own pensions,” Mr. Hoffa said. “The people who conceived that cynical scheme should be ashamed.” He said he preferred legislation introduced by Senator Bernie Sanders of Vermont, which if enacted would close tax loopholes and redirect the money to supporting troubled multiemployer pension plans.

Mr. Nyhan said he liked Senator Sanders’s proposal too, but recalled that a similar bill was introduced in 2010, when Democratic Party lawmakers controlled Congress, but was never approved. He said he thought it was even less likely that today’s fiscally hawkish, Republican-controlled Congress would enact such a bill. It was not safe to wait and see if the Sanders bill would pass, he said, because the passage of time made the insolvency more likely.

“The easy thing for my board to do would be ignore the problem,” he said. “We just don’t think this is the responsible thing to do.”

“We need either less liabilities or more money, and Congress is telling us we’re not getting more money,” he said.

...politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.