The words “bold” and “pension fund” don’t always go together easily. Then again, neither do bold and Canada.

But Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds.

With traditionally safe pension investments such as bonds no longer yielding enough to cover obligations, a number of Canadian plans are ramping up leverage strategies -- approaches intended to squeeze more profit from their investments by doubling down with debt. They are mortgaging some of their swankiest skyscrapers and forming in-house hedge funds that invest in complex derivatives like forwards, swaps and options, accepting more risk in an effort to keep their promises to retirees.

"We have to earn that return somehow," said Jim Keohane, chief executive of the Healthcare of Ontario Pension Plan, which has been among the most aggressive pursuing the new leveraged strategies. "If I don’t do this, what am I going to do instead?"

It’s not the first time the Canadian funds have pushed the envelope internationally. As early as the 1990s some began establishing private equity arms to take active stakes in businesses, successfully competing with Wall Street giants for such assets as department stores, highways and, recently, pieces of GE Capital.

Hero, Goat

Today, at least seven of Canada’s large pensions have "substantial" in-house hedge fund operations. By comparison, none do in the U.S. and only two do in Europe, according to data from the international pension fund consultancy CEM Benchmarking Inc. CEM, based in Toronto, declined to name the funds, but did say the five that have been at it the longest have beaten their benchmarks by an average of 0.9 percent annually over the last five years while the 10 largest U.S. funds have managed no extra return.

“In a world where safe investments provide unacceptably low returns, they have to move farther out the risk spectrum to get the kinds of returns they need,” said Malcolm Hamilton, a retired pension fund actuary who’s now a senior fellow at Toronto’s C.D. Howe Institute. “At the end of the day, you turn out being a hero or a goat, and there’s not much room in between.”

Poaching Talent

U.S. pension funds have generally addressed the same pressures by retaining the services of Wall Street hedge funds, CEM data shows, but high fees can eat away at gains.

Unlike in Canada, where professional boards tend to oversee public funds, in the U.S. the responsibility lies with elected officials who are hesitant to approve the compensation needed to attract Wall Street talent, according to Tsvetan Beloreshki, a New York-based pension fund consultant at FTI Consulting.

Canada’s public pensions, in contrast, have been poaching top talent off Wall Street for some time. The ranks at the Canada Pension Plan Investment Board, which manages the nation’s primary public retirement fund, includes veterans from hedge fund Golden Tree Asset Management and private equity giant Carlyle Group, as well as investment banks such as Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to the CPPIB website.

Derivatives Magnify

Don Raymond was recruited from Goldman to head up CPPIB’s public markets investments in 2001 and later began luring former colleagues from Wall Street as he set up an in-house hedge fund operation. At the time, leverage on CPPIB’s balance sheet -- measured as the difference between total assets and net assets -- was less than one percent. By 2011 it stood at 10 percent and by the end of the fiscal year, it had grown to 22 percent, according to publicly available data compiled by Bloomberg.

CPPIB returned 18.3 percent its fiscal year ended March 31 and had C$264.6 billion ($199.2 billion) of assets under management.

“I wouldn’t advise people to follow the Canadian path just because it seems easy; it’s actually not” said Raymond, who departed last year for Alignvest Investment Management. "If things do go wrong in derivatives, they tend to happen a lot faster than unlevered portfolios. A derivative will magnify things."

Skill Sets

Leverage at Healthcare of Ontario Pension Plan, widely known as HOOPP, now exceeds 100 percent of its net assets, leading to a more than doubling of the total assets at its disposal to invest. Ontario Teachers’ Pension Plan, the nation’s third largest, has leverage equal to half its net assets.

HOOPP earned 17.7 percent in 2014 while Ontario Teachers’ returned 11.8 percent. The Standard & Poor’s/TSX Composite Index, Canada’s benchmark equity gauge, returned 10.5 percent in 2014, including dividends.

“Traditional skill sets in pension funds are much different than what we have,” said HOOPP’s Keohane. “A lot of what we do is more like what you would see in a hedge fund.”

Asked about the leverage on its balance sheet, a spokesman for Ontario Teachers’ said derivatives are a better way to invest in certain assets. A spokesman for CPPIB said its leverage is a form of cash management that keeps the fund “nimble” and boosts returns.

Fund Firepower

In the case of HOOPP, Keohane said the fund needs to earn 3.4 percent above inflation to cover its pension obligations, no small feat given 10-year Canadian government bonds yield half that, U.S. ones are at about 2.3 percent and yields on $1.9 trillion of European debt are actually below zero. “So what we’re trying to do is find things that add incremental return with the least amount of risk,” he said.

The fact derivatives, unlike equities, can eventually expire and provide a payout means that risks from leveraging can be contained by investors with the means to ride out any interim storms, Keohane said. “We have an advantage over hedge funds because we have a balance sheet they don’t,” he said. “Nobody’s going to shake us out of a trade.”

Caisse Study

Yet that’s precisely what happened in the financial crisis to Caisse de depot et placement du Quebec, Canada’s second largest pension plan. The Caisse suffered a 25 percent loss in 2008 following a collapse in Canada’s market for bonds backed by short term corporate loans.

Those losses were compounded by leverage that had grown to 56 percent of assets, according to Roland Lescure, the fund’s current chief investment officer, who joined in a management shake-up made after the crisis.

"Suddenly, a book of derivatives that was not supposed to carry any directional risk started carrying some," he said. The Caisse has since brought its leverage down to about 20 percent of assets, mostly mortgages on its properties.

Proponents of today’s hedge fund strategies say the Caisse’s 2008 failure didn’t occur from using derivatives themselves, but from devoting too much money to a single market, which happened to freeze up.

C.D. Howe’s Hamilton is understanding of the new strategies but, recalling the financial crisis, still uneasy. "I’m sure there are a lot of banks who thought they knew exactly what they were doing, and they had the risks all covered off -- until they didn’t."

Another massive Canadian pension is making a move into the U.S. to directly compete with GPs.

The Public Sector Pension Investment Board, with $112 billion under management, formed PSP Investments Holdings USA LLC, a New York-based private debt investment group. The New York office, at 450 Lexington Avenue, is PSP’s first foreign office.

The group is expected to initially focus on private credit and debt, but will eventually include a small team for private investments, PSP said in a statement.

The private debt group is led by David Scudellari, who recently joined PSP’s U.S. affiliate as senior vice president, head of principal debt and credit investments of PSP Investments. Scudellari has held leadership roles at Goldman Sachs and Barclays Capital, where he was global head of finance and risk — Canada for Barclays in New York.

Scudellari is joined by Ziv Ehrenfeld, senior director, principal debt and credit investments. Prior to PSP, Ehrenfeld was a member of the leveraged finance group at Barclays focusing on natural resources.

“The leveraged finance landscape is currently in transition. With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investor such as PSP Investments to enter this trillion-dollar plus asset class through its U.S. affiliate,” said André Bourbonnais, president and chief executive officer of PSP Investments.

The Public Sector Pension Investment Board, one of Canada’s largest pension plans, has appointed David Scudellari to head a new unit focused on debt and credit investments.

Scudellari will lead PSP Investments Holding USA LLC, based in New York and help build up the firm’s presence in more illiquid and alternative debt securities. He has more than 30 years experience in capital markets, including positions at Barclays Capital Inc. and Goldman Sachs Group Inc., according to a statement from PSP.

“The leveraged finance landscape is currently in transition," said Andre Bourbonnais, PSP chief executive officer in a statement. "With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investors such as PSP Investments to enter this trillion-dollar-plus asset class.”

PSP, which oversees the retirement savings of federal public servants, including the Canadian Forces and the Royal Canadian Mounted Police, is Canada’s fifth-largest pension plan with C$112 billion ($85 billion) in assets under management.

It is always important for individual investors to know what is going on in the market. This year, one notable change in deal activity is the drop in leveraged finance transactions and the significant increase in corporate M&A activity. Deal activity in the U.S. remains steady, but the landscape has changed. Private equity firms and leveraged finance bankers are unable to raise enough capital in the debt markets to fund their acquisitions and larger, cash rich corporations are filling that void. Due to high stock prices and limited organic growth, corporations are engaging in takeovers in an effort to spur greater revenues.

Accordingly, this year has seen lots of M&A and less leveraged loan issuance than previous years. Retail investors, however, can rest assured that these are signs of a health market, relying on liquidity rather than risk debt issuance.

A disappointing year for leveraged loans

The leveraged loan market is likely to have one of its weakest years since 2012. Leveraged loans, which are typically issued to fund corporate acquisitions in the middle market have declined because cash-rich corporations are buying up all the opportunities, noted Bloomberg.

Since private equity firms and leveraged finance bankers cannot compete with their larger peers, only $235.1 billion of debt has been sold to institutional investors in 2015 – a 40 percent drop over the previous year. Additionally, only $37.5 billion of leveraged loans have been issued stemming from leveraged buyouts this year, versus $58.4 billion in 2014. It is important to point out that is not necessarily bad news for retail investors, although it is for leveraged finance bankers. William Conway, chief investment officer at private-equity firm Carlyle Group pointed out how M&A has eclipsed leveraged loan activity.

“With corporations struggling to find growth, they have turned to M&A to meet revenue targets while private equity activity has remained relatively muted,” said Conway, noted the media outlet. “It’s clearly an easier time to sell than it is to buy.”

Corporate M&A leads the charge in deal activity

Bloomberg reported while leveraged loan activity is lower than in previous years, total deal activity in the U.S. is strong. There have been many corporate takeovers in 2015 amounting to an impressive $1.09 trillion. In comparison, $45.6 billion was attributed to leveraged buyouts managed by private equity firms this year.

The reason that large corporations are funding so many deals this year is because organic growth has been slow, but stock prices are high, providing lots of liquidity. Companies have lots of cash reserves and need to bolster revenues. Accordingly, these corporations have leaned heavily on acquisitions and takeovers to maintain their growth. Barclays Managing Director of leveraged finance Ben Burton explained that executive officers have been confident in their buying activity this year and that the increased M&A has caused leveraged loan opportunities to dry up.

“We’ve been seeing management teams and their boards more willing to go out and do transformative M&A,” said Burton, according to the news source. “That’s taken supply away from the leveraged-loan market.”

Private equity players are edged aside

In a recent article, The Wall Street Journal described private equity firms as “wallflowers at a global deal-making party,” referring to their inability to generate strong deal activity this year. To clearly illustrate how much leveraged loans are in decline, in 2006, private equity deals represented 19 percent of all deals in the U.S. market. In the time before the credit crisis of 2008, private equity firms like KKR, Carlyle, and Blackstone completed many multi-billion dollar acquisitions, thanks to liberal funding from banks and bond investors. Post financial crisis, new regulations and stricter lending practices have made it more difficult for private equity players and leveraged finance bankers to raise enough money to fund their desired opportunities.

Ultimately, because of new regulations and high stock prices, leveraged loan issuance is on the decline, but this may be a good thing for individual investors. Cash rich corporations engaging in heavy M&A activity is likely to keep valuations high. The Wall Street Journal noted transactions such as Royal Dutch Shell’s $69.8 billion purchase of BG Group and Charter Communications’ $56.8 billion purchase of Time Warner Cable. For the everyday investor, high valuations and low debt levels mean a safer economic landscape to invest in for the long term. Leveraged loans are not a common investment vehicle for the common investor, but shares in publicly traded corporations are. As such, the current situation may provide some comfort to those who wish to see stability in their broad market portfolios.

As part of the transaction, SKY Leasing will acquire certain assets of Sky Holding Company controlled by leasing industry veteran Richard Wiley. Wiley and other key members of SHC management will form the leadership team of SKY Leasing.

“We are very excited to partner with ATL and PSP Investments, two investors with a deep understanding of the commercial aerospace sector,” said Wiley. “We look forward to building a best-in-class lessor with an initial target of $1 billion of Boeing and Airbus aircraft.”

With headquarters in Dublin, Ireland, and ancillary operations in San Francisco, California, SKY Leasing has over $250 million of initial equity capital available to provide sale/lease-back financing solutions globally to commercial airlines seeking to lease young mid-life Boeing and Airbus aircraft. SKY Leasing will also act as servicer to 54 aircraft on behalf of three securitizations.

“We have admired Richard’s prior ventures at SHC, Pegasus and Jackson Square Aviation and are delighted to partner with him and his management team in establishing SKY Leasing,” said Frank Nash, CEO of ATL. “As a sector-focused private equity fund, ATL is mandated to deploy equity capital into the transportation continuum and we see tremendous opportunity in delivering financial solutions to the global commercial fleet.”

“As a long-term investor, PSP Investments views aviation finance as an attractive sector to deploy significant capital in the years ahead,” said Jim Pittman, managing director of Private Equity for PSP Investments. “This investment is consistent with our direct and co-investment strategy to partner with experienced management teams who have the capability to scale investments over time. We look forward to supporting SKY Leasing as it pursues its ambitious growth plans.”

Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.

Aviva Investors will manage the assets and development for the joint venture.

The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.

“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.

Aviva Investors has more than £31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.

Amid a climate of austerity on the McGill University campus, new revelations about the pension that former Principal Heather Munroe-Blum recently started collecting has rankled many union groups.

Access to Information documents show that Munroe-Blum, who retired from her position as principal in 2013 and is no longer teaching at McGill, is entitled to a supplementary pension of almost $284,000 a year on top of the almost $87,000 she gets from regular pension plans from McGill and the University of Toronto.

The information also suggests that Munroe-Blum may have been earning much more than has been documented, perhaps as high as $740,000 — which would make it the richest package of any university president in Canada, then or now. That’s based on the fact that her supplementary pension entitlement should represent about 50 per cent of her highest average earnings.

However, Olivier Marcil, vice-principal of communications and external relations for McGill, said in an email that her salary was $369,000 plus benefits as previously reported, but that “adjustments were made to her pension calculation during that time which resulted in the ($284,000 pension payment) amount” (click on image below).

Munroe-Blum’s salary and benefits were often a sore point on campus, especially after it was revealed she was collecting a base salary of $369,000 as Quebec universities were being asked to absorb $124 million in cuts. There were also “contract benefits” of $128,000 to $226,000 a year.

The combined pensions, which she just started collecting on July 1, are bringing her almost $371,000 a year — which is as much as she was allegedly earning during her tenure as principal. Her supplementary pension alone — which was negotiated as part of her 2003 contract confirming her appointment as principal and vice-chancellor — has already paid her more than $96,000 since July 1.

“During her tenure here they reduced the benefits of the pension plan for employees but she has this insane, over and above pension plan which no one else gets,” said Sean Cory, president of the Association of McGill University Research Employees. “The amount that she is getting really caught me off guard.”

He says the fact that her regular pensions from U of T and McGill are $86,850 combined shows “just how good this extra pension plan is,” with Munroe-Blum collecting an additional $284,000 a year for the rest of her life.

It also raises some important questions: Why is Munroe-Blum being credited with years of service at both McGill and U of T for the purpose of calculating her supplemental pension from McGill? With 12 1/2 years of service at U of T, prior to joining McGill, this effectively doubles her pension entitlement and enables her to collect for all of that time at the higher principal’s salary rather than having some of it at the lower professor’s or vice-president’s salary she would have earned at U of T.

Marcil said that was negotiated into her original contract and that “I personally don’t know whether or not this is or was common practice among other university presidents.”

Why did McGill agree to such a lucrative pension package for Munroe-Blum? When she left the principal’s post in 2013, Stuart Cobbett, chair of McGill’s board of governors, defended her departure package in an op-ed in the Montreal Gazette, saying the university had great results to show from her leadership.

But Cory said Munroe-Blum’s pension package makes him wonder how many other former principals are collecting equally lucrative pensions, and how McGill — which has been crying about austerity and cutbacks — can sustain such long-term payments.

Molly Swain, president of McGill’s support employees union, said the revelations about Munroe-Blum’s pension package comes as McGill claims to have no money and is constantly instituting belt-tightening measures.

“That makes this tough to swallow,” she said, adding her union is representing students who were remunerated with only room and board for overseeing first-year students in residence and have been fighting to get what they believe is their rightful monetary compensation.

“It’s extremely hypocritical,” she said. “That’s an absolutely massive pension. It’s appalling.”

She said it also points to a culture at McGill, and other universities, of there being no accountability and quietly providing income and benefits that go well beyond the base salary of their top administrators.

However, that is something that seems to be changing. McGill’s current principal, Suzanne Fortier, made public her contract and the details of her compensation ($390,000 and not a lot of other perks), as did Alan Shepard, the president of Concordia University. The Université de Montréal has had a policy in place since 2009 that determines salaries based on the median of rectors and presidents of Canadian universities.

Still, Swain said, Munroe-Blum’s deal is concerning for employees.

“The university is maintaining austerity for a certain group of people — but not for people at the top,” she said.

Why will universities with these defined-benefit plans be 'exempted' from more stringent tests for pension solvency that apply to businesses? I have friends who are professors and others who work at various universities, including McGill, and they're not to happy with the way their DB plans have been mismanaged (McGill got sucked into the non-bank asset backed commercial paper --ABCP -- scandal that rocked the Caisse and other large Canadian pension funds).

The problem at Canadian universities and other universities is that they hide their pension problems from public scrutiny. Why? Because they're petrified if the public finds out, it will impact their fundraising as well as their constant cries to increase tuition fees.

Now, I happen to think you can make a case for raising tuition fees marginally, especially here in Quebec where students enjoy the lowest tuition fees in Canada and are asking for "free tuition like in Denmark" (without understanding how the Danish system works). But when I see how Canadian universities are mismanaged -- not just their pensions but general mismanagement in their operations -- makes me think twice about raising tuition fees.

True, universities are not corporations and shouldn't be run like corporations. But why should we give their defined-benefit plans less stringent tests for solvency? Who is monitoring their performance and why isn't this information easily accessible to the public and updated on a regular basis? I can say the same thing about Canadian cities and municipalities, the other pension time bomb which is rarely discussed. Most people haven't got a clue of what the hell is going on at these city plans.

This is why I think we should consolidate all defined-benefit pension plans -- private and public -- into larger public DB plans which are operating under more scrutiny and are more transparent and accountable for the decisions they take (not perfect but better than most smaller plans).

The CPP Fund ended its second quarter of fiscal 2016 on September 30, 2015, with net assets of $272.9 billion, compared to $268.6 billion at the end of the previous quarter. The $4.3 billion increase in assets for the quarter consisted of $4.2 billion in net investment income after all CPPIB costs and $0.1 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.62% for the quarter, or 1.55% on a net basis.

For the six month fiscal year-to-date period, the CPP Fund increased by $8.3 billion from $264.6 billion at March 31, 2015. This included $4.0 billion in net investment income after all CPPIB costs and $4.3 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.6% for this period, or 1.5% on a net basis.

“Despite significant declines across all major global equity markets and mixed results in fixed income markets this quarter, the CPP Fund showed a modest gain. Broad diversification of the investment portfolio across geographies and asset classes contributed to the Fund’s resiliency,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “As a long-term investor, our five- and 10-year returns are the most important measurements of our performance, and these remain strong.”

Victor Reklaitis of MarketWatch reports, What’s spooked the world’s biggest hedge fund on this Friday the 13th:

Even if you really want to buy stocks, you just might hold off on this Friday the 13th.

It’s not that you’re superstitious. The problem is all those other people who fret about unlucky days.

Those scaredy cats believe they’re in greater danger on days like today, so they become more anxious or distracted, and that ends up leading to actual trouble. “It becomes a self-fulfilling prophecy,” as one psychologist put it, to U.K. newspaper The Telegraph.

So let’s talk about selling — something the world’s largest hedge-fund complex revealed it’s doing in a big way. That comes as the bears have taken over this week, knocking 254 points off the Dow yesterday and putting it on track to halt a six-week winning streak.

Ray Dalio’s Bridgewater Associates disclosed it’s been slashing emerging-markets stocks, taking a chainsaw to its stakes in the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM) during the third quarter. More on that in the call of the day.

And note that a much-anticipated reading on retail sales “could spook stocks on Friday the 13th,” as CNBC puts it. That figure, which missed forecasts, is part of a bunch of data hitting today.

But for a little talk about buying, read on to the chart of the day. It sheds light on Corporate America’s stock-buyback spree, arguing it’s been unfairly vilified.

The call

Sell emerging markets stocks. That was the cry at Dalio’s Bridgewater Associates, at least for the third quarter.

The giant hedge-fund complex slashed its holdings in two big U.S.-listed emerging markets ETFs — VWO and EEM — by about 40% during the third quarter, as noted by a Barron’s blog post that cites a 13F filing. That helped drive a 31% decline in Bridgewater’s U.S. public equity holdings.

But how’s Dalio actually doing this year? Well, his All Weather Fund was up 4.1% in October, but still down 3.4% for the year, according to a Reuters report this week. His Pure Alpha II Fund was up 3.3% in October, for a year-to-date total return of 7.4%.

And the Bridgewater boss wasn’t just selling in Q3, with a GuruFocus report saying he went on a “diversification tear” and bought individual stocks such as Ralph Lauren (RL), FedEx (FDX), AT&T (T) and Oracle (ORCL).

“Remember when everybody was talking about the impact that ‘risk-parity’ investment strategies were having [on] markets?” Barron’s adds. Risk-parity pioneer Dalio pushed back against that criticism in September.

Buybacks are “widely vilified” and “greatly misunderstood,” argues Urban Carmel in a post over at The Fat Pitch blog.


“It’s true that corporations buying their own shares (buybacks) represents a large source of demand for equities and have helped push asset prices higher. But much of what is believed about buybacks is a myth,” the post says.

The blogger provides the above chart, which has a red line showing that gross buybacks in the second quarter “were less than 1% of market capitalization.”

“While the dollar amounts of buybacks are large,” they are “small relative to the size of the stock market,” Carmel writes. Go here to read the whole thing.

The global economy risks protracted "sub-par growth," the International Monetary Fund (IMF) warned on Thursday, as economists continue slicing their forecasts.

"With global economic prospects repeatedly marked down over the last five years, there is a concrete risk of a world economy persistently mired in sub-par growth, with unacceptably high levels of poverty and unemployment," the IMF said in a report out ahead of the G-20 leaders' summit in Turkey on Sunday.

Real gross domestic product (GDP) growth is seen averaging 3.1 percent year-on-year across the globe in 2015 and 3.6 percent next year by the IMF. This is down from the international body's July forecasts, which suggested economic expansion of 3.3 percent in 2015 and 3.8 percent in 2016. It is also marginally slower than the growth rates of 3.3 percent and 3.4 percent seen in 2013 and 2014, respectively.

"Growth remains fragile and could be derailed if transitions are not successfully navigated. In an environment of declining commodity prices, reduced capital flows to emerging markets, and higher financial market volatility, downside risks to the outlook remain elevated, particularly for emerging economies," the IMF said.

The three biggest risks to the global economy were seen as the upcoming normalization of monetary policy by the U.S. Federal Reserve, the slump in commodity prices and the slowdown in China. China's economy has steadily slowed since 2010 and is seen continuing to do so, with economic growth forecast at 6.8 percent in 2015 and 6.3 percent in 2016.

"China's rebalancing is generating large spillovers, and notwithstanding the Chinese economy's sizable buffers, could be disruptive abroad. Either a moderate slowdown or a harder landing over the medium term could produce sizable spillovers via slower global trade, a further weakening of commodity prices, and confidence effects," the IMF said.

Overall, growth is seen declining in emerging economies for a fifth year in a row in 2015, before strengthening next year. Notably, Russia's economy is seen shrinking 3.8 percent this year and 0.6 percent next, while Brazil's economy is declining by 3.0 percent this year and 1.0 percent in 2016.

Several international bodies and banks have issued anemic outlooks for global growth in recent weeks.

On Thursday, UBS forecast that Latin American economies would shrink by an average of 0.8 percent in 2015, marking the worst recession since the 2008 financial crisis and the greatest underperformance relative to the rest of the world in almost 30 years. It predicted the region's economy would continue shrinking in 2016, forecasting a contraction of 0.2 percent.

"We perceive the risks to the region to be skewed almost exclusively to the downside. We would highlight two: one, the risk that China slows more than expected, putting further downward pressure on trade with the Asian giant and on commodity prices, and potentially reducing Chinese external financing to the region; and two, the risk that Latin America faces a corporate credit event, particularly in Brazil," UBS economists led by Rafael de la Fuente said in a report.

On Monday, the Organisation for Economic Co-Operation (OECD) cut it global growth estimate to 2.9 percent this year, down from a forecast of 3.0 percent made in September and 3.1 percent made in June.

Plus, Moody's Investors Service warned this month that downside risks to the world economy had grown and that the proportion of countries awarded a "stable" credit outlook had fallen slightly from a year ago, while the share of "negative" outlooks had risen.

On Thursday, Germany's Ifo Institute said its index tracking the world economy had "clouded over," reading 89.6 points for the fourth quarter – down from 95.9 in the third quarter and below the long-term average of 96.1.

Some of the richest investors on Wall Street on Monday gave the world a glimpse of how they make their money. Or, in the case of the last quarter, how many of them lost money for their clients.

Investors like William A. Ackman, Larry Robbins, Leon G. Cooperman, Daniel S. Loeb, David Einhorn, Jeffrey W. Ubben and many more lost billions of dollars in large measure because the shares of the companies they placed bullish bets on plummeted over the summer and fall.

Grantham Mayo Van Otterloo, the investment management firm co-founded by Jeremy Grantham, increased its stake in Valeant Pharmaceuticals just as the Canadian drug company came under siege and its shares tumbled. In the third quarter, the Boston-based firm added 6.5 million shares of Valeant to its portfolio, making it one of the firm’s largest stock holdings.

Viking Global, the hedge fund led by O. Andreas Halvorsen, also added more Valeant stock to its portfolio during the same period, making it one of the top 20 shareholders. ValueAct, the multibillion-dollar firm founded by Mr. Ubben, held on to its position as a top shareholder. John A. Paulson, meanwhile, sold 110,000 shares in Valeant but still holds 8.9 million.

Shares of Valeant fell by more than 28 percent over the quarter that ended Sept. 30. They have plunged further into the red since then and are down 59 percent since the end of the third quarter.

These investors were among the thousands of hedge funds and other investment firms that made public information about which stocks they bought when they filed regulatory disclosures to the Securities and Exchange Commission on Monday. Known as 13Fs, the reports are filed four times a year. They offer investors a chance to see which sectors these traders were betting on when the quarter ended, roughly 45 days ago.

Valeant has been a feature in this quarter’s filings. In early August, the company rewarded investors as its shares surged to an all-time high of $262. But since then Valeant has ranked as one of the worst performing pharmaceutical stocks, facing concerns about a federal investigation into the company’s drug pricing policies and its reliance on a little-known mail-order pharmaceutical firm to distribute some of its products.

Other stocks have suffered, too. Some of the more popular names within the $3 trillion hedge fund industry — stocks like Platform Acquisition Holdings, Cheniere Energy and Community Health Systems — were among the worst performing big market-capitalization stocks in the third quarter.

While closely watched, the filings are an imperfect window into the holdings of money managers because they are inherently backward-looking. They include only stocks traded in the United States and do not include short positions, or bets managers might have made that a stock will fall in price. The filings also do not disclose what price a firm bought or sold a stock at, making it difficult to determine how much a hedge fund lost or made in trading a given stock.

Mr. Cooperman’s Omega Advisors, for instance, disclosed that it bought 485,000 shares of Valeant in the third quarter. But the firm did not appear to hold on to them for long. Steven G. Einhorn, Omega’s vice chairman, speaking at the Reuters Investment Summit on Monday, said the hedge fund had since sold its shares in Valeant.

But one thing the filings do show is that Wall Street’s biggest and wealthiest money managers continue to look a bit like a thundering herd when it comes to the stocks they buy and sell.

Take Kraft Heinz, the giant food conglomerate.

Joining Warren E. Buffett in his bet on Kraft Heinz, several managers added positions in the company, which was formed this year from the merger of H. J. Heinz and Kraft as part of a deal coordinated by Mr. Buffett and the Brazilian private equity firm 3G Capital. Mr. Cooperman, Mr. Loeb of Third Point, York Capital Management and Coatue Management were among the investors who added Kraft Heinz as a new position in their portfolios during the quarter.

Mr. Loeb also continued to build up his position in Baxter International, the medical equipment maker, and now has a 9.8 percent stake in the company. In August, he announced he was seeking two seats on the board of directors. Citadel, which was founded by the billionaire Kenneth C. Griffin and York Capital also bought shares in Baxter, which makes devices like intravenous pumps and dialysis systems. Jana Partners, the hedge fund founded by Barry Rosenstein, became one of the company’s biggest shareholders, buying up a 2.3 percent stake.

Starwood Hotels, which on Monday agreed to be acquired by Marriott International, was another favorite in the quarter. Paulson bought 3.6 million shares, making it the biggest shareholder in the Starwood. Viking built a new 3.1 percent stake, while Citadel now owns a 2.4 percent stake after scooping up shares in the quarter.

The renewable energy company SunEdison is another stock that has been called a hedge fund hotel for its popularity with investors. But both Omega and Third Point sold out of their positions.

SunEdison has been a favorite of David Einhorn of Greenlight Capital, who recently called it one of the few stocks that was a “successful winner” in a portfolio that has lost investors billions. Glenview Capital, the hedge fund founded by Mr. Robbins, sold 1.6 million of its shares but stills has a 3.1 percent stake.

On Monday, Mr. Einhorn also disclosed that Greenlight had sold some of its position in SunEdison. But he is still the company’s third-biggest shareholder, with a 5.9 percent stake.

Take the huge and unbelievable rally in coal stocks going on right now in companies like Arch Coal (ACI) and Peabody (BTU). The former hit a low of $1 earlier this month and is now trading above 8$ while the latter more than doubled during that time.

These are huge moves for coal shares in a sector that has been obliterated and where many companies have filed for Chapter 11, wiping out shareholders (I lost a ton when Patriot Coal went under but Alpha Natural Resources and Water Energy also wiped out shareholders when they filed for bankruptcy).

Is King Coal coming back from the dead? With China slowing down, I strongly doubt it but clearly there are big investors betting on these shares. Billionaire investor George Soros bought stakes in the two coal companies I mentioned above but the dollar amount is peanuts relative to the size of his overall stock holdings. I don't know if he's still buying coal shares this quarter but clearly momentum traders are having fun playing these shares (be very careful trading and investing in this sector, you can get killed).

Ontario’s five largest pension funds lost an estimated $2.4 billion during the last half of 2014 because of investments in fossil-fuel assets, according to a study released Tuesday by the Canadian Centre for Policy Alternatives.

It calculated that the Ontario Teachers’ Pension Plan took by far the biggest financial hit, losing $1.77 billion from fossil-fuel bets during a time that saw the price of oil cut nearly in half.

“If they’re putting money into fossil-fuel stocks, it should be incumbent on managers and trustees to justify why they’re doing that,” said Marc Lee, a senior economist with Policy Alternatives.

The study analyzed 20 Canadian pension funds with $587 billion in assets under management, including the Ontario Municipal Employees Retirement System (OMERS), Healthcare of Ontario Pension Plan (HOOPP), Ontario Pension Board, and Ontario Public Service Employees Union (OPSEU) Pension Trust.

On average, about 5 per cent of assets under management were in the form of fossil-fuel company stocks, which had a total value estimated at $27 billion prior to the oil-price crash. Six months later, the value of those equities had fallen by $5.8 billion, which the study called a conservative estimate.

Lee said losses can largely be blamed on declining oil and gas prices. He conceded that the analysis was limited by the lack of detailed disclosure from the funds’ managers.

“It’s why there needs to be more transparency,” he said. “That’s the conversation we hope to trigger with this report.”

Canadian pension funds have been largely silent on the issue of climate risks, while funds in Europe and parts of the United States have been much more engaged in the discussion, and are taking action.

In France, for example, amended legislation now requires institutional investors to report their carbon footprints and efforts to reduce them. Lawmakers in California have gone so far as to pass a bill forbidding its big pension funds from investing in coal stocks.

Last week, in advance of the G20 summit in Turkey, Bank of England governor Mark Carney proposed the creation of an industry-led disclosure task force on climate-related risks.

Carney, who is also chair of the Financial Stability Board, has previously warned that the “vast majority” of fossil fuel reserves may have to be left in the ground if the world is to keep global temperatures from rising to dangerous levels.

Disclosure of climate risks, Carney told a Lloyd’s of London event in September, “will expose the likely future cost of doing business, paying for emissions, changing process to avoid those charges, and tighter regulation.”

More big investors are choosing to reduce their exposure to climate risks. A recent report from consultancy Arabella Advisors found that 430 institutions, including the Canadian Medical Association, have committed to phasing out their fossil-fuel investments to some degree.

Meanwhile, more than 100 institutional investors representing $8 trillion in assets have signed the one-year-old Montreal Carbon Pledge. Those that took the pledge have committed to “measure, disclose and reduce portfolio carbon footprints.”

Addenda Capital, The Co-operators and the United Church are among the Canadian signatories, but so far there is no commitment from Canada’s largest pension funds.

That includes the Canada Pension Plan Investment Board (CPPIB), which manages $273 billion of Canadians’ retirement savings.

A separate report released Monday by Corporate Knights Capital estimated that the CPPIB has sacrificed $7 billion (U.S.) in value since 2012 by not shifting investment from carbon heavy energy companies and utilities to companies that get at least 20 per cent of revenues from clean technologies or new energy.

Dan Madge, a spokesperson for the CPPIB, said the fund’s investment in Canadian equities closely resembles the broader TSX Composite, which is heavily weighted towards energy. Dropping a major sector from the portfolio “would not be prudent,” he said, adding that it would reduce diversification and prevent the CPPIB from engaging directly with energy companies on the need for better disclosure on climate risks.

“Engaging with companies on this topic and pressing for improvement are necessary to protect long-term value,” Madge said. “Selling our fossil-fuel holdings to investors who might not be as engaged as we are is not the most responsible course of action.”

Besides, he added, total long-term performance of the fund is what matters. On that front, the CPPIB fund has a 10-year nominal rate of return of 8 per cent.

Corporate Knights also analyzed 13 other prominent global funds, including the $40.5 billion (U.S.) Bill & Melinda Gates Foundation Trust Endowment, which gave up $1.9 billion, and the $5.6 billion University of Toronto pension and endowment fund, which sacrificed $419 million.

Had the U of T divested from fossil fuels three years ago, it could have generated a large enough return to pay tuition for its entire student body for four years, said Brett Fleishman, a senior analyst at 350.org.

The University of Toronto Asset Management Corporation declined comment for this story.

Demand for insight on how carbon risks can affect stock holdings led the Toronto Stock Exchange to launched three new indices last month that track a “fossil-free” and two carbon-reduced versions of the S&P/TSX 60.

This article is part of a series produced in partnership by the Toronto Star and Tides Canada to address a range of pressing climate issues in Canada leading up to the United Nations Climate Change Conference in Paris, December 2015. Tides Canada is supporting this partnership to increase public awareness and dialogue around the impacts of climate change on Canada’s economy and communities. The Toronto Star has full editorial control and responsibility to ensure stories are rigorously edited in order to meet its editorial standards.

How weak energy prices hurts pensions

The Canadian Centre for Policy Alternatives looked at how falling oil and coal prices from June to December 2014 affected fossil-fuel equity holdings in 20 Canadian pension funds.

Here are the estimated losses:

Ontario Teachers’ Pension Plan: $1.77 billion

Ontario Municipal Employees Retirement System: $192 million

Healthcare of Ontario Pension Plan: $53 million

Ontario Pension Plan: $154 million

Ontario Public Service Employees Union Pension Trust: $188 million

Source: Canadian Centre for Policy Alternatives

The beauty of the stock market is that no one can tell you where to put your money—until now. Last month the Obama administration’s Labor Department issued Interpretive Bulletin 2015-01, which tells pension funds what factors to use when choosing investments, including climate change. Only a few tax lawyers noticed, but with U.S. pensions at $9 trillion, this is a gross power grab that will hurt the retirees it claims to protect.

In 2008 Labor issued guidance for parts of the Employee Retirement Income Security Act of 1974, affectionately known as Erisa, that environmental, social and government factors—for instance, climate change—may affect the value of investments.

Most pension fund managers, who have a fiduciary responsibility to maximize returns, have assumed that such factors can act as a tie breaker, if all other things are equal. The thinking was: Thanks for the heads up about the climate, but leave the investing to us. Managers could still weigh other factors above climate change without getting sued.

No more. According to the Oct. 26 bulletin from Labor: “Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tiebreakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”

The word “primary” is the rub. Investing is hard, as anyone who has bought a stock only to watch it crater 20% a week later knows. There are thousands of factors that influence daily stock prices—product, profits, management, competition, interest rates, global unrest, government interference, technology and so on.

You may have an opinion on climate change, I may have another. If it were settled science, would we need marching orders from Labor? Al Gore invests using his thesis on sustainable capitalism, and good for him. Just don’t force that on the rest of us.

This government is essentially saying: Don’t you dare invest in anything that causes or is hurt by climate change, or you’ll be sued for failing your fiduciary responsibilities. Energy, utilities and industrials are 20% of the market. How can pension funds now own any of them?

This is a divestment program, nicely paired with the U.N. conference on climate change in Paris later this month. But it won’t work. Stock prices are a collective opinion on the prospect of a company. As reality changes, so do opinions. There are plenty of socially responsible investment funds; they rarely succeed. You can shun alcohol, tobacco and gambling stocks all you want, but many Americans enjoy all three, often at the same time. As long as profits go up, these stocks will do well, leaving the socially responsible behind. At least that’s by choice.

Pushing politics on retirement funds will destroy returns. One little secret on Wall Street is that Erisa rules drive hedge funds to avoid pension money. It slows them down. As pension funds divest, hedge funds and other managers will gladly buy up undervalued climate-challenged companies.

The argument over climate change should roll on, but keep government out of portfolios. Facebook’s headquarters is on the San Francisco Bay. Sea-level “projections” from the National Research Council forecast it’ll eventually be swallowed up by rising oceans. So do I have to remove the stock from my IRA?

[..] as I argued three years ago when bcIMC was slammed over unethical investments, once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including big pharma, big tobacco, big banks, and big fast food companies that need lots of cows to make hamburgers (and cow emissions are more damaging to the planet than cars).

There's something else I want you to think about, pension funds have a fiduciary duty to achieve their return objective without undue risk. That's investment risk, not undue risk to the environment. Clean energy sounds great, and I'm all for it, but these stocks are also very volatile (mostly follow trends in energy prices), not to mention these companies aren't as big as fossil fuel companies so it's impossible for pensions to easily make the switch out of fossil fuel into clean tech.

And another thing, what if all those investors betting big on a global recovery turn out to be right?  You will see a massive rally in coal, steel, oil and oil drilling stocks. I wonder then if the Canadian Centre for Policy Alternatives will publish research on the cost of divesting out of fossil fuels (it's easier being an armchair quarterback when the prevailing trend is going your way).

Bombardier has signed a deal that will see the Caisse de dépôt et placement du Québec (CDPQ) invest $1.5 billion US in a newly created company that will hold the company's rail transportation business.

The giant Quebec pension fund — Canada's second-largest — says the investment will help stabilize the company's current financial situation.

The Caisse says it's betting on Bombardier and in rail transportation.

The $1.5 billion represents a 30 per cent stake in a new holding company, BT Holdco.

The company is a subsidiary of Bombardier Transportation and will be based in Germany.

The investment comes less than a month after the provincial government announced a bailout of more than $1.3 billion in the company's struggling CSeries jet program. Bombardier posted a loss of $4.9 billion US in the third quarter.

Rail industry has 'growth potential'

The Montreal-based company says the deal concludes its review of financing options for Bombardier Transportation, which sells subway cars and other mass transit systems.

"This investment by CDPQ, which has a long history as one of our major investors, is a testimonial to the growth potential of the rail industry and to Bombardier's leadership in seizing the opportunities this market offers on a global scale,'' Bombardier chief executive Alain Bellemare said in a statement.

Caisse president Michael Sabia said the investment is a safe bet.

"Bombardier Transportation is a global leader in the rail industry, with a robust backlog, predictable revenues, and meaningful potential for growth," Sabia said in a statement.

Karl Moore, an associate professor at McGill University, said it's a solid business deal, with more upside than Quebec's investment in Bombardier's CSeries program.

"It's a different part of the business. As Michael Sabia points out, it's a global business. It's relatively resilient during tough economic times because it's about government spending on rail companies, long-term infrastructure projects," he said in an interview with CBC's The Exchange.

He said protecting Quebec industry is less a consideration than getting good return for the pension fund that the Caisse invests.

"They've structured it in a way that they will get very good returns in a safe manner," he said.

After a global search for an investor in its rail division, in the end Bombardier Inc. stayed close to home, turning to Quebec’s biggest pension fund for a $1.5 billion (U.S.) cash infusion.

In exchange for the money, the Caisse de dépôts et placement du Quebec gets a say in board members as well as the promise of at least 9.5 per cent annual returns for its 30 per cent stake in a new holding company known as BT Holdco.

If Bombardier Transportation doesn’t deliver, then the Caisse can increase its stake to as much as 42.5 per cent over the next five years. If the company delivers better returns, then the Caisse can reduce its stake.

Caisse CEO Michael Sabia touted the arrangement, which values the company at $5 billion (U.S.), as giving its depositors “bond-like” protection but with the “up side” of equity.

Bombardier has the option to buy out the Caisse at the end of three years, with guaranteed returns of a minimum 15 per cent, on an annual compound basis.

Sabia called that 15 per cent rate very attractive, but said he hopes the pension fund isn’t bought out that point.

“We think the transportation business has a lot of interesting potential,” said Sabia during a conference call on Thursday. “Bombardier Transportation is already a global champion. I think it can be an even bigger and stronger one.”

That’s especially true because of demand in emerging markets like Asia and Latin America, he added.

“Obviously, there’s still a lot of work to do. That’s no secret,” Sabia said.

Bombardier’s Class B shares, which are down almost 70 per cent year to date, closed unchanged on Thursday at $1.28.

The Toronto Transit Commission is furious with Bombardier over its long-delayed streetcar order, first placed in 2009. To date, the TTC only has 11 streetcars, with another en route from Thunder Bay.

Originally, 73 were supposed be in use by the end of 2015, but the schedule was revised to 20, which Bombardier says will only be 16.

In December, the TTC is expected to file a notice of complaint, seeking $50 million in damages over the delay.

The investment by Caisse comes on the heels of a $1 billion (U.S.) commitment from the Quebec government for a 49.5 per cent stake in Bombardier’s struggling CSeries program.

Development of the CSeries program is years behind schedule and billions over budget, but the flight testing is now complete. The company expects certification soon.

However, sales for the all-new plane, in two sizes, have been sluggish with only 243 firm orders to date – and none in a year.

Porter Airlines, which has placed a conditional order for 12 planes, and options for another 18, will not be allowed to fly the jets from Toronto’s island airport, now that the Liberals have taken power in Ottawa.

As Bombardier has burned through cash to get the CSeries launched, it has had to make substantial job cuts and shelved plans for the Learjet85. Earlier this year, Bombardier raised $3 billion (U.S.) through a debt and equity offering.

With the Quebec investment and the deal with Caisse, which is scheduled to close in the first quarter of 2016, Bombardier estimates it will have access to $6 billion (U.S.) in cash and cash equivalents by year’s end.

As a condition of the Caisse deal, Bombardier must ensure there is always $1.25 billion (U.S.) in liquidity. Sabia said the Caisse never considered investing in the CSeries program, choosing instead in the train division.

Bombardier’s CEO Alain Bellemare, who took over from Pierre Beaudoin in February, says the company has plenty of cash to complete all its programs including the CSeries jet and new Global 7000/8000 business jets.

It also provides a cushion in case market conditions prove difficult, Bellemare told reporters on Thursday. “We now have ‘a safety net,’” he said. “We will also re-establish confidence with our clients which is key if we want to continue selling our products.”

On the third-quarter conference call in October, Bellemare said an additional $2 billion (U.S.) investment would be needed for the CSeries program in the coming years, given it is not expected to get to profitability before 2020 or 2021.

While Quebec has called on the federal government to join in with a cash infusion, the new Liberal government hasn’t acted yet.

Bellemare said the company is continuing talks with the federal government for assistance, declining to offer any details.

Investors are putting too much faith in Mario Draghi. The European Central Bank president is largely responsible for one of the most overcrowded trades in markets — and there is a risk it could all go horribly wrong.

In the past month, every investor I have spoken to has told me they are overweight European equities, citing the quantitative easing policy of Mr Draghi and the ECB as one of the main reasons. But is Mr Draghi creating a potential nightmare scenario for investors?

The European equity trade makes sense for a variety of reasons. The eurozone economy is recovering, albeit sluggishly, earnings are growing, valuations are relatively attractive and, most important of all, the ECB is buying billions of euros of bonds to underpin the market.

Indeed, European equities have rallied sharply since the start of September when Mr Draghi first hinted he was prepared to launch a second round of QE, expected in December.

Investors reason that it is unwise to fight a central bank. It makes sense to be fully invested in risk assets such as equities when a central bank is actively easing, as looser monetary policy encourages corporations to borrow at cheap rates.

This is certainly true. Euro-denominated investment grade corporate debt issuance has surged to a record high so far this year. This corporate borrowing often translates into higher profits as the money is invested for growth, which in turn boosts the share price.

With the US Federal Reserve expected to diverge from the ECB and tighten policy next month, it makes European stocks even more appealing, particularly given that US valuations are stretched.

With the ECB easing and the Fed tightening, the euro is likely to remain weak. A cheaper euro should lift demand for exports. This is helpful to Germany, the region’s biggest economy, which relies on exports for growth.

However, when a trade becomes this crowded, there are risks.

Upside is limited because the good news is largely priced in. More significantly, if the market reverses, it can be difficult to exit as everyone wants to sell at the same time.

Investors only have to look back to the summer for a reminder of the dangers. Worries about the Chinese economy wiped out all the equity gains from Mr Draghi’s first round of QE, which was launched in March, in a matter of days. European equities plunged about 10 per cent in August.

Yet some investors remain sanguine about China. They think the Chinese can keep the economy ticking over at a relatively healthy rate. The latest Chinese data show the economy is growing at just under 7 per cent.

Although there are some doubts over the accuracy of China’s figures and they are nowhere near the rates of close to 12 per cent before the financial crisis, a number of investors think growth is at least 6 per cent, enough to maintain global growth and underpin market sentiment.

According to the World Bank, the expansion of the Chinese economy in the past decade means it is contributing more to global gross domestic product at its current growth rate than it was in the pre-crisis boom years.

But these same investors made this case before the summer sell-off. If Chinese growth falters and the country depreciates its currency again, then Europe will suffer. Not only will it undermine the big German exporters, it could import deflation to Europe.

Some argue that Mr Draghi could simply keep expanding QE. The US spent three times more than the current ECB programme of €1.1tn in three rounds of QE over more than five years.

But did the ECB join the QE game too late? With Europe’s economy barely growing and inflation below target, Mr Draghi might not be able to save the region. Those investors stuck in an overcrowded trade will then have to pay the price.

I've been warning my readers of the euro deflation crisis and having just visited the epicenter of this crisis, I came away convinced that the euro will fall further. In fact, I wouldn't be surprised if it goes to parity or even below parity over the next 12 months. There will be countertrend rallies in the euro but investors should short any strength.

What is my thinking? First and foremost, the European Central Bank (ECB) is falling way behind the deflation curve. Forgive the pun, but as long as Draghi keeps dragging the inevitable, meaning massive quantitative easing, the market will continue pounding the euro. The fall in the euro will help boost exports and more importantly, import prices, fighting the scourge of deflation.

Once the ECB starts ramping up its quantitative easing (QE), there will be a relief rally in the euro and you will see gold prices rebound solidly as inflation expectations perk up. This is counterintuitive because typically more QE means more printing which is bearish for a currency -- and longer term it will weigh on the euro -- however over the short-run, expect some relief rally.

But the problem is this. You can make a solid case that the ECB has fallen so far behind the deflation curve that no matter what it does, it will be too little too late to stave off the disastrous deflation headwinds threatening the euro zone and global economy.

Low inflation, Mario Draghi once famously said, means people can “buy more stuff.”

The consumption-driven recovery in the euro area is currently proving the ECB president's point. But can the consumer be in too good a mood?

If price gains are so slow that employees stop seeing the need to demand higher wages, then that makes Draghi's task of returning euro-area inflation back to the target of just under two percent all the more difficult. Euro-area annual inflation came in at 0.1 percent in October.

Wage settlements in the region rose an annualized 1.56 percent in the third quarter, just above the record-low of 1.44 percent at the beginning of the year, ECB data released Tuesday show. While the bloc's unemployment rate of just under 11 percent is clearly weighing on salaries, even in areas where joblessness is low, like Germany, there are few signs of wage inflation.

“Workers adjust their demand to the low inflation pattern,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “The current environment doesn’t push workers to request higher wages.”

To be sure, wage dynamics are notoriously asymmetric; especially in Europe they don’t contract in response to a downturn as much as they rise during a boom. And while they are near a record low, that's still way above inflation.

But soft wage settlements today can crystallize weak inflation for years to come. That's one of the reasons why the ECB will consider fresh stimulus at their Dec. 3 policy meeting.

“Salaries are probably the main driver of services inflation,” said Marco Valli, an economist at UniCredit SpA in Milan. “This low level of wages growth confirms a picture of only slow pick up in core inflation.”

[...] Europe is already spiraling into deflation, and if Chinese deflation gets worse and they are forced to devalue the yuan, it will flood their economies with cheap imports, exacerbating the euro deflation crisis at the worst possible time.

I’ve attended two conferences in two days where both the power and the impotence of the European Central Bank (EBC) have been on vivid display.

Its political power is considerable, both in form and in substance. At both seminars, the ECB speaker—ECB Board member Peter Praet at the first, and ECB President Mario Draghi at the second—spoke first, and then left. In substance, the ECB has no need to defend its policies because it is unimpeachable in its execution of them. In form, it does not even considering engaging with its subjects—I use the word deliberately—in open and robust discussion.

It’s not unusual for a political leader to turn up at an event, speak and then immediately leave. But even political leaders have to tolerate sometimes being savaged by fearless CNBC moderators when they speak in public. And I expected that economic leaders would want to hang around and get some feedback—positive or otherwise—from the economic elite that gathered to hear them. Might they not learn something about why their policies weren’t working as they had expected them to?

Not a bit of that for the ECB. There was plenty that could be criticised, even within the context their speeches set. Speaking at the FAROS Institutional Investors Forum, Praet acknowledged, numerous times, that the ECB had failed to hit many of its policy targets—in particular, he noted how many times the ECB had to put off into the more distant future its objective to return to 2% inflation. But there was no chance to challenge him as to why they had failed, because after a couple of perfunctory exchanges with the moderator, he was out the door.

At the more prestigious Frankfurt European Banking Congress Draghi stated bluntly that the ECB would continue to do all it takes to support asset markets via QE—in the belief that this supported the real economy. This was a declaration of the intention to use unlimited power—since there is no effective limit to the ECB’s capacity to buy assets from the private sector.  A politician would have to respond to sceptics about the use of such unlimited powers. But there was not even a single question, nor even a murmur, from the audience.

There was however a jolt of recognition. Draghi was going to continue supporting asset markets, and that was that. The King spoke, the subjects listened, and The King left. There was nothing his subjects could do about it but cope with its consequences.

German Finance Minister Wolfgang Schäuble, who book-ended the EBC conference, had no such luxury of freedom from interlocution—nor did he need it. He engaged in a lively banter with his interviewer as he defended the far more limited power he has over expenditure in Germany. I doubt that Schäuble will suffer electoral defeat any time soon, but unlike Draghi he faces the prospect that it could happen. That doesn’t make him any less resolute in defending his policies; it just means that he has to defend them.

This is what the originally principled concept of “Central Bank Independence” has transmuted into. The promise was that the economy would be spared the disturbances caused by politicians making economic decisions on political grounds: “pork-barrelling” would be a thing of the past, and we would all be better off for it, for two reasons. Firstly, vital economic decisions would be made without consideration of political advantage. Secondly, the people making those decisions would be economic technocrats, who know how the economy works and would therefore make decisions that made rampant economic instability a thing of the past.

This is where the ECB’s power gives way to impotence. The ECB can cower politicians and the public with its unlimited monetary powers. But it can only make the economy dance to its tune if it knows how the economy works, and can duly pull the requisite levers to keep the economy on an even keel.

Clearly the ECB does not know how the economy works. Not only did it—and all other Central Banks—not anticipate the crisis in which it is now embroiled, its policies to try to restore what it sees as normal (unemployment of about 5-6% and inflation of about 2%) have thus far failed. Even on their most favourable forecasts, the Euro region won’t achieve its pre-crisis level of output until early 2016. Not only does this make the crisis far longer and deeper than any post-WWII European downturn, it also underscores how poorly Europe has performed compared to the USA. There the 2008 crisis also ranks as the longest and deepest downturn, but the USA returned to pre-crisis output in less than half the time that the Europeans hope that they will end up doing.

The ECB is not alone in being granted political independence by politicians who, more likely than not, were happy to pass the poisoned chalice of making interest rate decisions to bureaucrats than to hold itself themselves in the days when inflation was rampant and increasing interest rates to control it aggravated voters. The US Federal Reserve also has independence. But in the USA, all it would take to overturn it, as a failed experiment in economic management, is a vote in Congress. In Europe, an entire new treaty between all 19 member states of the Euro would be required.

The ECB therefore resembles nothing else if not the unaccountable monarchies whose failures to serve the common good led to its revolutions in the 18th and 19th centuries. Laughably, Peter Praet claimed that the ECB was accountable if it failed to meet its objectives—as he admitted it had:

"At the same time, a central bank cannot allow itself too much discretion over the time horizon when inflation should return to its target. A numerical objective which is rarely realised – looking forward and in retrospect – is no hard objective. Our independence rests on the fact that we are accountable, and that means delivering price stability over a horizon that is verifiable by the public."

How are they accountable? They don’t have to answer to any national parliament as the Federal Reserve does—in fact the ECB charter expressly says that it is unaccountable:

"Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from EU institutions or bodies, from any government of an EU Member State or from any other body."

Not only are the unaccountable in statute, they have become unaccountable in behaviour as well. What politician could admit to the raft of failures for which the ECB is now responsible, and leave a public conference without answering a single question, nor having to consider an opposing viewpoint—such as the one I gave immediately after Praet at his conference?

Unaccountability with success is one thing. Unaccountability with failure, as the ECB and the entire economic apparatus of the European Union is delivering to Europe, is another altogether. Such impasses have not worked out well in the past—especially in Europe.

Alberta’s provincially owned investment management company bought a $200-million stake in a local renewable power provider Monday, the day after the province announced it would phase out coal-fired electricity generation.

Alberta Investment Management Corp., which manages more than $75-billion worth of investments from the province’s government pension funds, bought $200 million worth of TransAlta Renewables Inc. shares Monday from the green-electricity provider’s parent company, TransAlta Corp.

TransAlta Corp. will continue to be the largest investor in the renewables company, and plans to use the proceeds from the sale to pay down its debt.

The deal would make AIMCo the second-largest investor in TransAlta Renewables, with eight per cent of its shares, after parent company TransAlta, which also owns coal-fired power plants throughout Alberta.

AIMCo CEO Kevin Uebelein said in a release that “TransAlta has set forth a bold transition plan that will see it become one of North America’s preeminent clean power companies.”

AIMCo operates at arm’s length from the provincial government, which on Sunday announced a series of new climate change policies that included a 2030 deadline for coal-fired power producers to cut their emissions to zero.

Alberta currently generates 55 per cent of its electricity from coal power, but the province wants to replace two-thirds of that power capacity with renewables by 2030.

Many industry analysts expect utility companies to shut down their coal-fired power plants by that time as a result of the new provincial policies.

Unlike many of its coal-power peers, TransAlta’s shares surged on Monday morning following the government’s announcement. The company’s share price rose nine per cent to close at $5.96.

Trading in the company’s shares was halted leading up to the announcement that AIMCo had acquired a large stake.

RBC Capital Markets analyst Robert Kwan upgraded the company to “sector perform” and said “TransAlta has the potential to benefit from replacement generation.”

TransAlta had been planning to phase out most of its coal generation by 2030 under existing federal regulations, while Edmonton-based competitor Capital Power Corp.’s coal fleet was still expected to operate beyond then.

Kwan said Capital Power is “possibly the biggest ‘loser’ in all of this, but the impact is really far into the future.”

TransAlta Renewables Inc. is buying Ontario and Quebec wind and hydro power assets from its parent company, TransAlta Corp., for $540-million and taking on a new big investor: Alberta’s public-sector pension manager.

It’s selling an 8-per-cent stake in the company to Alberta Investment Management Corp., or AIMCo, for $200-million.

TransAlta Renewables, which is currently 76-per-cent owned by TransAlta Corp., is also offering $150-million of shares in a bought deal.

The series of transactions comes a day after TransAlta Corp., Canada’s largest coal-fired power generator, learned that the Alberta government will phase out that form of energy by 2030 under its sweeping plan to fight climate change. The company and a government-appointed negotiator will try to reach an agreement on how to deal with stranded asset value.

It is selling its majority-owned affiliate the Sarnia Cogeneration Plant, Le Nordais wind farm and Ragged Chute hydro facility, adding a total of 611 megawatts of generating capacity. As part of the deal, TransAlta Renewables will issue $175-million in shares to the parent as well as $215-million in unsecured debentures.

The acquisition of long-term contracted generation capacity will support a 5-per-cent increase in dividends, TransAlta Renewables president Brett Gellner said in a statement.

In its budget last month, the Alberta NDP government gave AIMCo, along with other public agencies, a mandate to search out investments in companies that will help the province diversify the economy away from oil and gas.

Kevin Uebelein, AIMCo’s chief executive officer, said the investment is not related to the timing of Alberta’s economic diversification strategy or its climate plan. Still, AimCo is actively scouting for more deals in renewable energy as policies around carbon emissions firm up.

“The short answer is yes,” Mr. Uebelein said in an interview. “As governments move to change the shape of the playing field with regard to carbon taxing and other measures, then these other forms of power generation, the payback calculation will adjust in response to those government actions.”

The AIMCo investment is expected to close on Thursday. As part of the deal, the fund manager gets the right to acquire shares in future financings.

Under the bought-deal financing, TransAlta Renewables will issue 15.4 million subscription receipts at $9.75 each to underwriters led by Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. They will be converted into common shares when the acquisition closes in January, the company said.

A recent report by research firm Preqin (the 2016 Private Equity Compensation and Employment Review) received some well deserved attention. Apparently, the year 2015 has already seen more private equity General Partners raise their first fund or at least reach their first close than the previous record year of 2007 had witnessed. For Limited Partners currently participating or planning to participate in this segment of the alternative investment sector, this growing number of GPs is bad news. The healthy clearing-up of underperformers that had taken place in the years since the financial crisis is poised to be undone. The weaklings that rightly failed to raise follow-on vintages after 2008 are being replaced by new managers with questionable or unproven track records.

We can understand why GPs are finding it hard to resist the call of 1.5% to 2.5% in annual management fees they can suck out of their closed-end funds. For LPs, however, caution is de rigueur as the upside is far from obvious.

If market data stating that, historically, half to two-thirds of GPs failed to meet the hurdle rate are to be believed, there is no apparent reason why the new breed of PE fund managers will do better than their predecessors. For this to happen, several conditions would have to be met.

First, deal opportunities would need to be more compelling than in previous decades. There is serious doubt that it will be the case in North America and Europe, two continents where there is saturation of fund managers and structural over-intermediation of M&A transactions. There remains an oversupply of funds chasing too few deals. The newcomers certainly won’t remediate this situation. The permanently high number of secondary buyouts is just one indicator that GPs have run out of fresh targets. A second clue is the persistent high multiples assigned to LBO targets.

Second, the first-time GPs would have to possess unique and superior investment skills compared to those of the previous generation. Given that the vast majority of newly established funds are being run by executives who used to work at existing GPs – in some cases they even come directly from old GPs who failed to raise a new fund on the back of poor performance – LPs need to query why these new managers should be expected to do a better job than when they worked at their former employers.

Third, to outperform their peers, the new generation would have to have received better training. Given that most have the same educational and professional background (ex-investment bankers, accountants and consultants, and MBA degrees) as the existing managers, doubt also exists about their ability to bring a new approach to deal making, portfolio management and value creation.

Fourth, the lack of market branding means that most new GPs will struggle to attract the best deal flow. Thus, many of them will be left with complex transactions or those that their better established rivals are not interested in because of low-return prospects. Beggars can’t be choosers. Desperate to do deals just to show that they are active, first-time managers will not be able to be as selective as more prestigious PE houses. That cannot be good for expected returns.

Last, in view of the mess created during the bubble years, the upstarts would require better risk management than GPs that have already run several vintages. It is very unlikely to happen for two key reasons: small funds (most of the first-time GPs will only be managing a few hundreds of millions at best) will not have the capabilities to establish best-practice corporate governance and investment discipline; and deal doing rather than risk management will be top of the agenda as they try to prove themselves. In short, their risk profile is likely to be worse than old-time players.

What should LPs still keen to invest in the space do to limit the risk of seeing this new breed of private equity managers underperform as so many members of the previous generation did?

They should impose strict discipline, for a start.The best way to do so is by sitting on the GP’s advisory board in order to regularly monitor the GP’s investment and portfolio management practices. Similarly, co-investing alongside General Partners gives LPs the opportunity to assess whether the GP’s due diligence process is thorough enough. But the best way to improve performance is to make sure that fund managers receive proper training. Traditionally, transaction experience had mattered a great deal more than classroom lectures. For that reason, on-the-job learning and one-day seminars had been the preferred methods to acquire new techniques and stay up-to-date with the latest developments. Given how competitive and mature the space has become, that approach won’t do anymore. Since few GPs will ever be willing to spend a meaningful proportion of management fees in training staff, they will have to be compelled by their Limited Partners.The latter can make the payment of fees conditional on a minimum allocation towards an annual training budget. Naturally, the quality of these training sessions will need to be monitored. If there is one thing that the recent fee scandal has shown, it is that GPs cannot be trusted to be acting in the interest of their investors. There is little evidence to suggest that this year’s swarm of first-time managers will behave differently, even though it would be a sure way for them to differentiate themselves from the old guard.

Wall Street traders are circling a corner of the bond world they say is taking an unwarranted beating in anticipation of rising interest rates.

They are betting on closed-end funds, often-volatile structures that mostly cobble together risky collections of bonds and often employ leverage, or borrowed money, to try to boost returns.

These funds as a group are wallowing in their lowest levels since the financial crisis, partly on the expectation that the Federal Reserve’s expected interest-rate increase will make their holdings less attractive.

The average closed-end fund recently traded around a 9% discount to the value of its holdings, according to Morningstar Inc., and some funds focused on bank loans and junk bonds run by Blackstone Group LP and KKR & Co. are down even more (click on image).

Some investors, including hedge-fund manager Boaz Weinstein and mutual-fund heavyweight Jeffrey Gundlach, say the selloff is unlikely to get worse. Among investors’ reasons: Closed-end bond funds don’t have to unload their assets when investors sell, meaning they may be able to wait out a storm and collect bond income while more-traditional mutual funds could be forced into fire sales if withdrawal requests pile up.

Meanwhile, activist investors see opportunity, too, with some acquiring stakes in particularly beaten-down funds and pushing for changes in management or how the funds are structured.

“You could be in for a wild ride,” said Patrick Galley, chief investment officer of $3 billion RiverNorth Capital Management LLC. Last week, RiverNorth’s hedge funds attempted to force changes at a closed-end fund run by Fifth Street Finance Corp. in which the firm holds a stake. Fifth Street rebuffed the attempt as “inflammatory and misleading.”

Closed-end funds are usually the province of relatively small individual investors who tend to buy and hold while collecting regular interest off the corporate bonds, municipal debt, bundled loans and other assets the funds hold.

They share more similarities with stocks than their more common open-ended mutual-fund cousins. Closed-end funds raise money in an initial public offering, and the managers immediately invest the sum raised. When subsequent investors buy into or sell these funds, the fund price changes much like a stock after an initial public offering. The amount of investor money the fund has available to use remains unchanged from what it raised in the original offering.

Closed-end funds typically trade at either a discount or a premium to the value of their underlying holdings. By contrast, traditional open-ended mutual funds must buy and sell assets to match the amount of money coming in or going out.

Closed-end funds, including offerings from managers like BlackRock Inc. and Nuveen Investments Inc., manage a cumulative $264 billion, according to the Investment Company Institute.

Jonathan Isaac, director of product management at Eaton Vance Corp. , a fund company that manages closed-end funds, said there was a “cloud hanging over the market,” in the form of the Fed’s interest-rate plans. If rates rise, the cost of leverage will go up, and the fixed-income holdings favored by many closed-end funds also could lose value.

Other problems abound. Closed-end funds sold off far past their current levels in the crisis. With retail investors comprising the biggest investor group by far, according to analysts and fund managers, these funds are particularly prone to dropping quickly if the economy stumbles and ordinary savers grow fearful.

“It’s definitely more in the high-risk area” of investor portfolios, said Morningstar analyst Cara Esser.

Still, the lopsided prices lately have attracted the attention of Wall Street traders known for their ability to move quickly on investments that appear out of whack.

Mr. Weinstein, who earned attention for his early bets against J.P. Morgan Chase & Co.’s “London whale” trader who cost the bank more than $6 billion in ill-fated trades, is pitching deep-pocketed investors on a new fund that will invest only in closed-end funds—and in some cases place the trades without any offsetting hedges, people familiar with the matter said.

The main hedge fund at Mr. Weinstein’s Saba Capital Management LP has been hit by persistent investor redemptions and three consecutive years of performance losses headed into 2015, when it is up through mid-October, according to investor documents.

With his latest offering, Mr. Weinstein is cutting his fees to win back investors. He is halving Saba’s customary 20% performance charge for the new closed-end-focused fund, his first to bet on a specific area, and forgoing collection on even the reduced fee until the venture achieves an 8% annual return.

That target is made easier because even if closed-end funds drop further in price, investors may still make money. The funds pay investors a yield, often in the high single digits percentagewise a year, offering a potential cushion if discounts deepen.

Mr. Gundlach, founder of $76 billion asset manager DoubleLine Capital LP, this month told investors that credit-focused closed-end funds were a better bet than equities, because the former were unlikely to fall much further from their current prices.

Others are looking to profit by buying minority stakes in struggling closed-end funds and jostling for management changes, merging underperforming funds or converting them to open-ended varieties with an eye toward quickly liquidating their holdings.

The campaigns have had mixed success. AllianceBernstein LP agreed in August to convert one of its closed-end funds after an activist fight, but Pacific Investment Management Co. beat back a campaign from a hedge fund demanding new board members and a share-repurchase program.

One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet.

Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation.

The Norwegian Pension Fund, the world's top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. "Every real estate investment deal we do is funded by sales of government bonds," says Yngve Slyngstad, the chief executive.

It already owns part of the Quadrant 3 building on Regent Street, and bought the Pollen Estate - along with Saville Row - from the Church Commissioners last year. But this is just a nibble. The fund is eyeing a 15pc weighting in property, an inflation-hedge if ever there was one.

The Swiss bank UBS - an even bigger player with $2 trillion under management - has issued its own gentle warning on bonds as the US Federal Reserve prepares to kick off the first global tightening cycle since 2004. UBS expects five rate rises by the end of next year, 60 points more than futures contracts, and enough to rattle debt markets still priced for an Ice Age.

Mark Haefele, the bank's investment guru, said his clients are growing wary of bonds but do not know where to park their money instead.

The UBS bubble index of global property is already flashing multiple alerts, with Hong Kong off the charts and London now so expensive that it takes a skilled worker 14 years to buy a broom cupboard of 60 square metres (click on image).

Mr Haefele says equities are the lesser risk, especially in Japan, where the central bank has bought 54pc of the entire market for exchange-traded funds (ETFs) and is itching to go further.

As of late November, roughly $6 trillion of government debt was trading at negative interest rates, led by the Swiss two-year bond at -1.046pc. The German two-year Bund is at -0.4pc.

The Germans and Czechs are negative all the way out to six years, the Dutch to five, the French to four and the Irish to three. Bank of America says $17 trillion of bonds are trading at yields below 1pc, including most of the Japanese sovereign debt market.

This is a remarkable phenomenon given that global core inflation - as measured by Henderson Global Investor's G7 and E7 composite - has been rising since late 2014 and is now at a seven-year high of 2.7pc (click on image).

In the eurozone, the M1 money supply is rising at a blistering pace of 11.9pc. A case can be made that the European Central Bank should go for broke, deliberately stoking a short-term monetary boom to achieve "escape velocity" once and for all. The risk of a Japanese trap is not to be taken lightly.

Yet even those who feared looming deflation in Europe two years ago are beginning to wonder whether the bank is losing the plot. If the ECB doubles down next week with more quantitative easing and a cut in the deposit rate to -0.3pc, as expected, it will validate the iron law that central banks are pro-cyclical recidivists, always and everywhere behind the curve.

Caution is in order. The investment graveyard is littered with the fund managers who bet against Japanese bonds, only to see the 10-year yield keep falling for two decades, plumbing new depths of 0.24pc this January (click on image).

Inflacionistas in the West have been arguing for six years that the QE-fuelled monetary base is about to break out and take us straight to Weimar or Zimbabwe. They failed to do their homework on liquidity traps.

Yet their moment may soon be nigh. Catalysts are coming into place. Globalisation is mutating in crucial ways.

China, the petro-powers and Asian central banks led a sixfold increase in foreign reserves to $12 trillion between 2000 and mid-2014 (and trillions more in sovereign wealth funds). This flooded the global bond markets with capital and stoked asset bubbles everywhere.

The process has gone into reverse. Data from the International Monetary Fund show that these reserves dropped by $550bn in the year to June as capital flight and the commodity bust forced a string of countries to defend their currencies. Saudi Arabia is still burning through $12bn a month to cover its budget deficit.

This shift in reserve flows amounts to fiscal stimulus for the world. Less money is being hoarded as capital: more is going back into the real economy as spending - or it soon will do - exactly what the doctor ordered for a 1930s world, starved of demand (click on image).

It comes as China goes through a social revolution, moving through the gears towards affluence. Consumption was barely above 30pc of GDP in 2010, the lowest ever recorded in a major country in history. The Communist Party is trying to push it to 46pc by 2020.

Or, put another way, Ben Bernanke's "savings glut" is starting to dissipate. The global savings rate peaked at a record 25pc and is finally rolling over.

There is a further twist. Professor Charles Goodhart from the London School of Economics says the entry of China and eastern Europe into the world economy after 1990 doubled the work pool of the globalised market at a stroke. It lead to a surfeit of labour and a quarter century of wage compression. The rich got richer. Deflation became entrenched.

This episode is over. The old age dependency ratio is about to rocket. Labour will soon be scarce again. Wages will rebound. Prof Goodhart thinks it will push real interest rates back to their historic norm of 2.75pc to 3pc. "We are on the cusp of a complete reversal," he says.

All the stars are aligned for an end to the deflationary supercycle, and therefore for an end to the 35-year bull market in government bonds.

With equities already at nose-bleed levels it is hard to know exactly where to seek refuge. Wall Street's S&P 500 has been on a blinder for nearly seven years, and is now hovering near an ominous double-top.

The MSCI index of world equities is trading at 18 on the CAPE price-to-earnings ratio. This is below its 40-year average of 22, but only if you believe the earnings (click on image). 

Mr Haefele from UBS recommends niche plays in clean air, emerging market healthcare and, above all, oncology and immunotherapy, a sector currently running 300 clinical trials, with treatments costing $100,000 per patient.

Spending per cancer patient jumped 60pc in the US, Canada and Germany from 2010 to 2014, a pattern likely to be repeated over time in China, east Asia and Latin America.

His colleague Bill O'Neill says equities are "not cheap" on the UBS proprietary gauge, but none of the bank's crash signals is flashing red, and you have to put money to work. "We think there is a good chance that the cycle will last another three years," he said.

Mr O'Neill said the "trillion dollar question" is whether the Fed and fellow central banks will wake up one day to find that the inflationary horse has already bolted.

My fear is that this is exactly what will happen. There will then be an almighty reckoning as global finance braces for a rush of staccato rate rises by the Fed, and a belated pirouette by the ECB (click on image). 

We will then find out whether the world can cope with public and private debt ratios hovering at all-time highs of 265pc of GDP in the OECD club and 185pc in emerging markets, up 35 percentage points since the top of the pre-Lehman credit bubble. Equities will not fare very well either when that moment comes.

It is a story for late-2016, perhaps, but not today. Until then, laissez les bon temps rouler.

The nation's largest public pension fund peeled back a layer of secrecy to reveal that it has paid private equity managers $3.4 billion in bonuses since 1990, a hefty figure sure to heighten arguments over whether the controversial sector is worth its high risk and expense.

The California Public Employees' Retirement System said Tuesday that it paid $700 million in so-called performance fees just for the last fiscal year that ended June 30. The disclosure comes as critics increasingly question the wisdom of pension funds investing in such complicated corporate deals as start-ups and leveraged buyouts.

CalPERS officials emphasized that private equity generated $24.2 billion in net profit for the state's retirees over the 25-year period, a strong performance that they said more than makes up for the sector's added risk, complexity and cost.

Like many public pension funds, CalPERS has relied on the potentially large returns on private equity investments to help finance benefits for its 1.7 million current and future retirees — and to avoid turning to taxpayers to make up shortfalls.

“Returns from those sorts of investments need to be much higher than returns on assets not bearing similar risks and especially to justify such huge fees,” said David Crane, a Stanford University lecturer in public policy. “From what I read today about CalPERS' returns on private equity, it's hard to see that being the case.”

CalPERS' disclosure, although not the first of its kind, is considered a landmark because of the system's size and influence in the market. It's expected to lead major pension funds to demand similar, or even more, disclosures from a multitrillion-dollar industry that has been insulated from calls for reform by the relatively rich returns it generates.

The California State Teachers' Retirement System, for instance, plans to take up the issue of private equity disclosure at the system's February board meeting.

“The CalSTRS Investment Committee has asked [its staff] for a greater degree of reporting and cost accounting information, which will require additional resources,” said Ricardo Duran, a spokesman for the nation's second-largest public pension fund.

The bonuses, known in the industry as carried interest, don't include annual management fees. Typically, bonuses amount to 20% of profits over a certain target on top of a 2% management fee, a formula known as 2-and-20.

Because of its size, now at about $295 billion in assets, CalPERS has been able to command a somewhat lower bonus rate of about 12%. Still, private equity's outsized compensation system remains baffling to many.

California State Treasurer John Chiang is sponsoring legislation requiring even more extensive fee disclosure for private equity firms doing business with the state's pension funds.

“Too much compensation information remains missing, and no amount of profit-sharing returns should cause us to turn a blind eye to demanding full transparency and accountability from firms which call themselves our partners,” Chiang said Tuesday.

“With any other investment class, it would be a no-brainer to demand full disclosure of all fees and costs.”

CalPERS officials, who ordered the review after acknowledging a need to get a better handle on private equity fees, believe they have reaped the benefits of private equity and are satisfied with the performance of the $27.5-billion portfolio, which represents 9% of the total fund.

“We have been rewarded appropriately for the risks that we took,” said Ted Eliopoulos, CalPERS' chief investment officer.

Crane isn't so sure. The difficulty in getting out of private equity deals and the high debt loads the sector usually carries raise questions about whether the investments are worth the inherent dangers, he said.

“If the returns were worth the leverage and liquidity risks, then such levels of fees might be worth it,” said Crane, who was an advisor to former Gov. Arnold Schwarzenegger.

The high-stakes business of buying and selling whole companies, dominated by massive global players such as Carlyle Group, Blackstone Group and Kohlberg, Kravis & Roberts, has struggled to shed a swashbuckling image that dates to its roots in the go-go leveraged-buyout boom of the 1980s.

Last week, its board agreed to cut the fund's expected rate of return to 6.5%, from 7.5%, though in incremental steps that could take 20 years. The move drew criticism from Gov. Jerry Brown, who urged the system to cut the expected return to 6.5% over five years to curb its reliance on higher-risk investments.

Caught in the middle are taxpayers, who must make up for investment shortfalls — a challenge for communities struggling with retirement costs they said are already unsustainable.

In a recent report, CalPERS' main consultant strongly endorsed the private equity sector, noting that it had an annualized rate of return of 11.9% over the last 10 years, compared with 6.6% for CalPERS' stock portfolio, and that it performed better than CalPERS' public stocks over all relevant periods.

Last year, for instance, the private equity portfolio's 8.9% return blew away the public stock portfolio, which returned an anemic 1%.

But Eileen Appelbaum, senior economist at the Center for Economic and Policy Research, a Washington think tank, countered that CalPERS' private equity portfolio has failed to meet its own benchmarks over the last one, three, five and 10 years, important measures that seek to account for the added risk that comes with complicated and cumbersome assets.

“Comparing CalPERS' private equity returns with the overall returns of the pension fund and/or their target return for the pension fund is meaningless,” she said.

Steven N. Kaplan, a finance professor at the University of Chicago, cautioned that although CalPERS' private equity portfolio has indeed beaten alternatives in the past, even after fees, studies show the rate of outperformance has slowed more recently.

“You should watch it very carefully going forward,” he said.

In addition, anyone who watches financial markets will notice that the returns from CalPERS’ “global equity” portfolio, which is the “Public Equity” shown in its slides, look peculiarly anemic. That’s because CalPERS has a 50% allocation to foreign stocks. Thus CalPERS’ global equity results are lousy due to CalPERS having a currency bet that turned out badly hidden in it. That in turn is used, misleadingly, to bolster the case for private equity. The fact that CalPERS is underperforming in public equities is a problem it needs to address directly and not use as a trumped-up excuse for not asking tough questions about private equity. 

The starkest proof of how CalPERS’ board is willing go to extreme, and in this case, illegal steps to defend staff rather than oversee it came in its Governance Committee meeting last month. We’ve chronicled how the board fell in line with recommendation by staff and its new, tainted fiduciary counsel, Robert Klausner, for fewer board meetings, even though CEO Anne Stausboll offered no factual support for of her assertion that her subordinates are overworked or that she has considered, much less exhausted, alternatives for streamlining the process or increasing staffing. Moreover, to the extent that board meeting take a lot of employee time, Stausboll’s stage management of the monthly board meetings via illegal private briefings is a major contributor.

In the next section of this board meeting, Klausner and most of the board participated in what one observer called a “hating on JJ Jelincic” session. Board member JJ Jelincic has engaged in what is an unpardonable sin: he asks too many questions at board meeting and occasionally requests documents from staff. If you’ve looked at board videos (as we have) the alleged “too many questions” are few in number save when staff obfuscates and Jelincic tries to get to the bottom of things.

This section of the Governance Committee meeting clearly shows that the board, aided and abetted by Klausner, is in the process of establishing a procedure for implementing trumped-up sanctions against Jelincic, presumably so as to facilitate an opponent unseating him in his next election. But Jelincic’s term isn’t up until 2018, so from their perspective they are stuck with an apostate in their ranks for an uncomfortably long amount of time. Part of their strategy appears to harass him into compliance with the posture the rest of the board, that of ceding authority to staff and conducting board meetings that are largely ceremonial. We strongly urge you to watch the pertinent portion in full, and have provide a link and annotations at the end of this post.*

And what are Jelincic’s supposed cardinal sins, aside from being too inquisitive? That of using the California Public Records Act (California’s version of FOIA) to request documents that staff refused to produce. Mind you, Jelincic has used the PRA all of three times, in #2029 on June 8, 2015, #2077 on July 14, 2015 and #2084 (a duplicate of #2077, so it is not really a separate request, as far as staff effort is concerned) on July 16, 2015. And these requests were for a small number of recent, readily accessible records. By contrast, virtually all of our Public Records Act requests have been far more difficult to fulfill, so it is hard to depict Jelincic’s modest submissions as burdensome.

And as to the other bone of contention, that Jelincic making these queries is an embarrassment to staff? Yes, as we’ll discuss in detail, staff ought to be embarrassed, since their refusal to provide information is rank insubordination and a further sign of an out-of-control organization that should trouble every CalPERS beneficiary. But if the board weren’t making a stink about Jelincic (almost certainly at the instigation of staff), it’s a virtual certainty that no one would have noticed, since the monthly PRA logs are read by hardly anyone, and certainly not reported on by the media.

So substantively, submitting a mere two Public Record Acts in response to staff intransigence has resulted in the board attacking Jelincic, when any properly-functioning board would be all over staff for their high-handedness in refusing a request for documents by a board member.

Every legal expert we’ve consulted in this matter has been appalled by the refusal of CalPERS’ staff to supply records to a board member when asked. For instance, we contacted two law professors, each at top law schools, both with considerable expertise in trustee matters. Each took a dim view of the notion that staff was trying to duck board member requests for information.

The disclosure was a long time coming. It is a step in the right direction. However, it is not complete. It provides 17 years of data but only for the funds that we still have active positions in. It ignores closed funds which is where you see only realized values, not manager estimates.

It also fails to reflect the $1.2 billion in accrued carry.It ignores the $1.3 billion in net management fees CalPERS has paid in just the last 3 years. Portfolio company fees, discounts and waivers remain a black hole but the flash light will come.

I have been told it is a breach of my fiduciary duty to disparage staff so I will not comment on the Naked Capitalism story. I think there is some merit to Dan Primack's comments on the timing.

The pension system, which is the nation’s largest with $295 billion in assets under management, reports that its active private equity fund managers have realized $3.4 billion in profit-sharing between 1990 and June 30, 2015. That is compared to $24.2 billion in realized net gains, which works out to an effective carried interest rate of just 12.3%. For the 2014-2015 fiscal year, the shared profit totaled $700 million on $4.1 billion in realized net gains, or a 14.6% effective carried interest rate.

For context, the industry standard for carried interest is 20%. That would suggest that CalPERS has been a savvy negotiator, but it’s also worth noting what today’s data dump is missing:

1. CalPERS only released data for active funds, as opposed to all of the private equity funds in which it has invested since 1990. Excluded are any fund positions that have been sold or liquidated. A CalPERS spokesman says: “We have limited recourse to seek the data from exited, inactive, sold, liquidated, etc. funds. We felt the best use of our time and resources was to focus on active funds – 98% of cash adjusted asset value is represented. And moving forward we will be consistent in that approach.”

2. We do not know actual carried interest structures for any of the funds, many of which might include preferred returns (i.e., hurdle rates). In other words, certain private equity funds only begin generating carry once they have returned the entire fund plus something like 8%. As such, the realized profit-sharing may be artificially low.Even without a hurdle rate, carry is rarely made effective until a fund repays its principle, meaning carried interest can be artificially low in a fund’s early years (something exacerbated by the pension system’s decision to only report active funds). This could be partially rectified if CalPERS also released data on accrued carried interest — something it requested from its fund managers earlier this year — but it is unclear if such figures will be forthcoming.

The world’s biggest pension fund suffered a grim third quarter, losing $64bn— or 5.6 per cent of its value— as global stock markets fell.

Although much of the loss was likely regained as markets rallied in October, it is a reminder of the risks Japan’s Government Pension Investment Fund is taking after ramping up its equity exposure.

Results from the $1.1tn GPIF are likely to show increased volatility in the future after it changed its target portfolio to 50 per cent equity last year to boost returns and help service Japan’s rising pension bill.

“The volatility of short-term profits may have increased, but from a long-term perspective the risk of a shortfall in pension assets has decreased,” said Yoshihide Suga, the government’s chief cabinet secretary.

Most of the losses came from its holdings of domestic and international equities, which were down 12.8 and 11 per cent respectively, while domestic bonds generated a modest profit.

The losses were almost identical to the GPIF’s benchmark indices for those assets. Since the end of the third quarter, Japan’s Topix stock market index has rallied by almost 12 per cent to close at 1,580 on Monday.

Periods of loss are fairly common for the GPIF, which recorded annual declines in 2007, 2008 and 2010, but they are politically sensitive in Japan because the fund’s assets back basic pensions for most of the population.

It comes after a period of spectacular performance for the GPIF, which returned more than 12 per cent in 2014 as the yen weakened and the Japanese stock market rallied.

The results show the GPIF has largely completed its shift into equities. Equity holdings were towards the bottom of its target range, but that likely reflects the weakness of stock prices at the end of the quarter.

Its attempts to put cash into private equity and alternative investments remain painfully slow, however, with a portfolio allocation of just 0.05 per cent at the end of the quarter. That is equivalent to just $550m.

Japan is unusual in having accumulated assets to support part of its public pension system. The reallocation towards riskier securities is one of prime minister Shinzo Abe’s reforms, aimed at paying the pension bill of the world’s most elderly population, and thus relieving pressure on the public budget.

Political analysts say it has had the dual benefit of boosting the stock market, however, allowing Mr Abe to claim results for his economic programme. A series of smaller public pension funds are in the process of mirroring the GPIF’s asset shift.

Japan’s giant pension manager is unrepentant after a push into equities saw the fund post its worst quarterly result since at least 2008.

There’s no reason to doubt the 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund’s investment strategy, officials said on Monday in Tokyo as they unveiled a 7.9 trillion yen loss for the three months through September. The slump was GPIF’s first negative return after revamping allocations last October, when it doubled holdings of Japanese and foreign shares.

The loss will test the resolve of the fund’s stewards and of Prime Minister Shinzo Abe, who called for the shift out of bonds to riskier assets such as equities as the government tries to spur inflation. Sumitomo Mitsui Trust Bank Ltd. and Saison Asset Management Co. say that while the public may question the safety of their pension savings, GPIF should be judged on how it meets the retirement needs of the world’s oldest population over a longer horizon.

“They will see some criticism for this. But that’s more of an issue of financial literacy," said Ayako Sera, a market strategist at Sumitomo Mitsui Trust in Tokyo. “The liabilities of public pensions have an extremely long duration, so it’s best not to carve it up into three-month periods. However, from a long-term perspective, it’s necessary to continue monitoring whether the timing of last year’s allocation was good or not.”

The fund shifted the bulk of its holdings at a “terrible" time, just as stocks peaked, Sera said.

GPIF lost 5.6 percent last quarter as China’s yuan devaluation and concern about the potential impact if the Federal Reserve raises interest rates roiled global equity markets. That’s the biggest drop in comparable data starting from April 2008. The pension manager’s Japan equity investments slid 13 percent, the same retreat posted by the Topix index, and foreign stock holdings fell 11 percent. The fund lost 241 billion yen on overseas debt, while Japanese bonds handed it a 302 billion yen gain.

GPIF is likely to have purchased 400 billion yen of Japanese stocks and 1.7 trillion yen in foreign equities during the July-September quarter after its exposure to the asset class declined following the rout, according to Nomura Holdings Inc.

Equity Rebound

Things are looking up. The Topix rallied 14 percent since the start of the fourth quarter, while a gauge of global shares gained about 7.1 percent. As of Sept. 30, GPIF had 43 percent of its assets in equities around the world.

The asset manager “seriously considered" whether to continue with its current investment mix before deciding it’s the right approach, Hiroyuki Mitsuishi, a GPIF councilor, said on Monday. Short-term returns are more volatile these days, but there’s less risk that GPIF will fail on its long-term objective of covering pension payouts, he said. Fund executives have argued that holding more shares and foreign assets will lead to higher returns as Abe’s inflation push risks eroding the purchasing power of bonds.

“Short-term market moves lead to gains and losses, but over the 14 years since we started investing, the overall trend is upwards,” Mitsuishi said. “Don’t evaluate the results over the short term, as looking over the long term is important.”

Currency Loss

A stronger yen contributed to GPIF’s quarterly loss, with the currency gaining 2.2 percent against the U.S. dollar in the quarter.

GPIF has started to hedge some of its investments against fluctuations in the euro, which it sees declining in the short term on expectations for further central bank easing, the Wall Street Journal reported Tuesday. The fund is in a position to use hedges at any time, Mitsuishi said in response to the report, while declining to comment on whether it had.

GPIF hadn’t posted a quarterly loss since the three months through March 2014. The most recent results included returns from a portfolio of government bonds issued to finance a fiscal investment and loan program, with GPIF providing such figures since 2008. If those are stripped out, the drop was the fund’s third-worst on record, exceeded only by declines in the depths of the 2008 global financial crisis and the aftermath of the Sept. 11, 2001 terror attacks.

“They changed their portfolio knowing something like this could happen, and they’re not going to change their investment policy because of this,” said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “They reduced domestic bonds and increased risk assets such as stocks, so temporary losses can’t be helped when there’s chaos in the market like in August and September."

Public Relations

For Tetsuo Seshimo, a fund manager at Saison Asset Management in Tokyo, GPIF gets a pass on its performance given it was in line with benchmark indexes, and a failing grade on its public-relations strategy.

“If you have half your portfolio in stocks, this kind of thing can easily happen," he said. “However, the public will probably be surprised. The issue is whether they have explained this properly -- they haven’t.”

GPIF knows it needs to convince the public that it’s doing the right thing. It unveiled a new YouTube channel on Monday, which will have videos of its press conferences.

“People are probably very interested in GPIF’s results,” said Mitsuishi. “We want to directly explain to them that a long-term view is important.”

Japan’s ¥135 trillion ($1.1 trillion) public pension fund has started to hedge a small amount of its investments against currency fluctuations, according to people familiar with the matter.

Japan’s Government Pension Investment Fund started to hedge against fluctuations in the euro in the “short term” due to a negative outlook for the currency amid expectations for further easing by the European Central Bank, the people said.

The fund previously didn’t hedge any of its roughly ¥50 trillion in assets denominated in foreign currencies. A GPIF official declined to comment on whether the GPIF currently was using currency hedging or not, but said that the fund was ready to use currency hedging if deemed necessary.

The decision shows the GPIF becoming shrewder about selectively disclosing information about its investment strategy and also in trying new ways for managing risk on its massive portfolio. Concern about market impact made the fund reluctant to try such tools in the past.

The GPIF used a strategy involving a “tailor-made benchmark” to “quietly hedge” and not attract market attention, said one person with knowledge of the matter.

A rise in volatility in global financial markets has pushed some institutional investors to adopt hedging strategies. Norway’s sovereign wealth fund started hedging equity holdings against currency risk earlier this year, citing a rise in currency market volatility. In the U.S., the U.S. dollar’s gains have pushed more pension funds to adopt hedging strategies in the past year.

A strengthening of the yen helped amplify losses to the GPIF’s portfolio in the July-September quarter. The fund posted its worst performance in the quarter since 2008, as holdings fell 5.59%.

Some large pension funds and sovereign wealth funds around the world don’t hedge their currency exposure, which involves taking positions that would at least partially offset declines in the value of the currencies in which investments are held. Some investment officers believe the effects of currency movements even out over time due to their long investment time frames.

Though the GPIF’s mission is to achieve enough returns to fund pension payouts for the next 100 years, the fund usually reviews its portfolio every five years, and releases quarterly updates on performance.

Hedging could potentially allow the GPIF to soften large fluctuations in quarterly performance. A hedging strategy would also make it harder for hedge funds and other investors to analyze the impact of GPIF’s activity on foreign currency markets.

"If the BOJ were to move slowly toward achieving the price target, wage adjustments would also be slow," Kuroda told business leaders in the central Japan city of Nagoya, home to auto giant Toyota Motor Corp.

"In order to overcome deflation -- in other words, break the deadlock -- somebody has to show an unwavering resolve and change the situation. When price developments are at stake, the BOJ must be the first to move."

Japan relapsed into recession in July-September as slow wage growth and China's slowdown hurt consumption and exports.

Consumer prices have also kept sliding due largely to the effect of falling energy costs, keeping the BOJ under pressure to expand its massive stimulus programme to meet its pledge of accelerating inflation to 2 percent by around early 2017.

Kuroda said the recent weakness in exports and output was unlikely to hurt companies' investment appetite for now, as robust domestic demand has made the economy resilient to external shocks.

But he warned that the slowdown in emerging markets, if prolonged, could hurt business sentiment and discourage companies from boosting capital expenditure.

"We'll ease policy or take whatever steps necessary without hesitation if an early achievement of our price target becomes difficult," he told a news conference later on Monday.

The BOJ has recently joined government calls for firms to use their huge cash-pile to boost wages and investment, so far with limited success.

While the BOJ cannot directly influence wages, it can help push them up by reinforcing its commitment to achieve its price target, Kuroda said.

"If Japan were to emerge from deflation and see inflation hit 2 percent, it's important that companies start preparing for that moment by investing more on human resources and capital expenditure," he said.

He also said that while monetary policy does not directly target currency rates, the BOJ will closely monitor yen moves because of their big impact on Japan's economy.

"What's most desirable is for exchange rates to move stably reflecting economic and financial fundamentals," Kuroda told business leaders.

Policy makers weighing a deeper foray into equities shows how the world’s third-biggest stock market has become one of the most important Abenomics battlegrounds. The Topix index is up 21 percent since the central bank unexpectedly tripled its ETF budget almost a year ago, and Citigroup Global Markets Japan Inc.’s Tsutomu Fujita says there’s room for them to triple it again. For Amundi Japan Ltd., expanding the program would do more harm than good.

“At a fundamental level, I don’t support the idea of central banks buying ETFs or equities,” said Masaru Hamasaki, head of the investment information department at Amundi Japan. “Unlike bonds, equities never redeem. That means they will have to be sold at some point, which creates market risk.”

When BlueCrest Capital Management told investors Tuesday it would no longer oversee money for outsiders, one thing founder Michael Platt didn’t mention was that clients had already pulled billions of dollars this year.

Platt, who cited client demands and pressure on fees as a reason for his decision, isn’t alone in feeling the heat from investors. Firms including Och-Ziff Capital Management Group LLC and Mason Capital Management have seen cash flee this year, and others such as Fortress Investment Group LLC’s macro funds business shut down after redemptions and losses.

Hedge fund investors are losing patience even with marquee firms as many of them struggle this year, especially those that offer macro strategies or stock funds heavily weighted to rising shares. Some managers have lost money for two years running, while others such as David Einhorn’s Greenlight Capital are suffering declines that rival their worst year. After the weakest third-quarter inflows in six years, the industry could see outflows in the fourth quarter, said investors and bankers who watch the ebb and flow of hedge fund assets.

“The fourth quarter will be flat and possibly negative,” said Peter Laurelli, head of research at Evestment Alliance, which tracks hedge fund investments.

Hedge fund managers got off to a promising start in 2015, outpacing equity benchmarks including the Standard & Poor’s 500 Index. The second half of the year has proved more challenging as volatile markets create some of the steepest losses since the 2008 financial crisis for some of the most prominent managers in the business.

Ackman, Einhorn

The $2.87 trillion industry added $45.3 billion in net deposits in the first nine months of the year, according to Hedge Fund Research Inc. Only $5.6 billion came during the three months ended Sept. 30, the lowest third-quarter take since 2009, when a net $1.1 billion was deposited. If no money pours into funds in the current quarter, inflows in 2015 will be at least 40 percent below last year.

Among the most prominent losers in the second half is Bill Ackman, whose Pershing Square Capital Management is down more than 17 percent in 2015 through November. The firm has been hurt by its investment in Valeant Pharmaceuticals International Inc., whose shares have slumped 31 percent this year amid scrutiny over drug prices.

Einhorn’s Greenlight Capital has declined 21 percent this year, as positions such as SunEdison Inc., Consol Energy Inc. and Micron Technology Inc soured. Einhorn’s worst annual loss was in 2008, when his fund fell 23 percent.

Mason’s Slump

Others firms have been losing money for more than a year. Mason Capital, an event-driven fund based in New York, was down about 20 percent from the start of 2014 through this year’s third quarter, according to investors. Assets fell to about $5.6 billion from about $9 billion at the end of last year.

Fortress Investment Group LLC said in October it was closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Earlier that month, Bain Capital decided to shutter its Absolute Return Capital fund after more than three years of declines.

At BlueCrest, assets have shrunk by more than 40 percent this year to $7.9 billion, mostly from withdrawals after years of lackluster returns in what was once its biggest fund. New Jersey’s public pension plan decided to pull $284 million from one international fund as of June 30, citing “disappointing” returns just over a year after adding to its investment.

Hanging On

Och-Ziff, run by Dan Och, saw $4.2 billion leave its $30 billion multistrategy funds in the first nine months of 2015. Its biggest fund is little changed this year. The firm could face more withdrawals in 2016, depending on the outcome of an investigation by the U.S. Justice Department into whether it broke bribery laws in accepting an investment from the Libyan Investment Authority. Och-Ziff has told investors the matter is likely to be resolved next year, according to a person briefed on the matter.

Spokesmen at the firms declined to comment on flows and performance or didn’t return calls.

Some firms will be able to hang on to much of their cash regardless of performance. Certain investors in Ackman’s Pershing Square Capital Management can only take out one-eighth of their money every quarter, meaning it takes two years to exit completely. At the end of 2014, those restrictions applied to clients accounting for about a third of the firm’s $18 billion. About another third was permanent capital from a share sale last year.

Among the biggest winners is Millennium Management, run by Israel Englander. Its hedge fund pulled in a net $4.1 billion, bringing assets to $32.5 billion at the start of November, according to a person familiar with the firm.

[..] he didn't buy stock: He went to two derivatives dealers, Nomura and UBS, and bought call options on Friday that give him any gains in value of Valeant's stock above the strike price of $95. He also sold those dealers put options, which put him on the hook for any losses in the value of the stock below the strike price of $60. And he sold other call options with a strike price of $165, capping his upside: If the stock gets above $165, he gives up any further gains. Then he did the same thing again on Monday, only with strike prices of $100, $70 and $130. The options he bought cost about $235 million, plus about $9 million of hedging costs ; the options he sold brought in about $169 million.

While the S&P 500 has struggled to hang onto its gains all year, long-short fund managers were able to differentiate by wagering on winning industry groups within technology, according to Mark Connors, Credit Suisse’s global head of risk advisory. This year’s long-short returns are poised to top every other strategy tracked by the firm.

“Macro factors still weigh on markets, but instead of everything lifting as in 2013 and 2014, you’ve had some segmentation by sectors this year,” said New York-based Connors. “Equity long-short funds picked up on that.”

John Burbank’s Passport Capital, Lee Ainslie’s Maverick Capital, Paul Hudson’s Glade Brook Capital Partners and Adam Bernstein’s Pagoda Asset Management have made bets that individual stocks would fall, known as short trades, that have driven their funds’ performance in recent months.

The average stock-picking hedge fund, as represented by the Absolute Return U.S. Equity Index, gained just 0.04 per cent from the beginning of January through October. That’s less than the Standard & Poor’s 500 index’s gain of 2.7 per cent, including dividends, over the same period following sharp sell-offs in August and September. Virtually all stock hedge funds bet that some stocks will rise and others will fall, but most are net owners of stock, meaning they do best when shares rise.

The main fund managed by $4.4-billion Passport is up 12.8 per cent through October thanks to a slew of profitable short bets, according to performance information and an Oct. 30 letter to investors seen by Reuters. Specific bets were not named, but Passport’s third-quarter gain of 6.7 per cent by its Global fund was driven by shorts on stocks in the basic materials sector, the letter said. The fund also made money betting against energy stocks and shorting crude oil directly. A spokesman for Passport declined to comment.

Shorts have also boosted $10-billion Maverick, whose main hedge fund is up about 16 per cent this year through October, according to investor materials seen by Reuters.

“Our short investments were profitable in every industry sector and each region in which we invest,” Ainslie wrote in a letter to investors summarizing the third quarter, when the fund gained 2.7 per cent.

More information on the shorts was not disclosed, but Maverick had its largest long bets on technology, media, and consumer stocks at the end of the third quarter, according to a recent public filing, including Liberty Global, Aramark and Google. The letter also noted that the fund took a relatively conservative posture toward market risk earlier in the year, a move that paid off in recent months.

Glade Brook, which invests in technology, media, telecommunications and consumer sector stocks, also gained from short bets.

The firm’s hedge fund’s 2.7-per-cent return over the third quarter was driven by betting against unnamed traditional retailers, especially those hurt by growing competition online, and old-line media companies hurt by the types of companies it is long, such as Facebook and Google parent Alphabet Inc, according to an investor letter seen by Reuters.

The hedge fund is up about 12 per cent net this year, according to a person familiar with the situation, with longs and shorts contributing roughly the same amount to performance. The largest single winner is a long bet on online travel agency Expedia Inc, according to the person. Glade Brook manages slightly more than $1-billion, according to the letter, with $314-million in its hedge fund strategy (The majority is in private equity funds that bet on fast-growing technology companies such as Uber and Snapchat).

A final example is Pagoda. The $211-million firm, launched in September 2014 by veterans of Highbridge Capital Management, saw its main fund gain 14.5 per-cent trough October, according to a person familiar with the situation. The fund gained 5.1 per cent in the third quarter thanks to shorts on undisclosed companies in leisure and retail sectors, among others, according to a letter sent to clients seen by Reuters.

One well-known manager who has added to his shorts is Dan Loeb of Third Point.

“The environment for short selling is also attractive,” he wrote in a recent investor letter, “and we have more single short names than long positions in our book today.”

A spokesman for Third Point declined to comment. Its main fund has returned virtually zero for the year after gaining 4.7 per cent in October, according to a performance update seen by Reuters.

2015 is turning out to be one of the worst years on record for hedge funds. But for those losing faith in their stock-picking capabilities, one research paper provides a comforting conclusion — hedge funds may not be so bad at it after all.

According to the Hedge Fund Research HFRI Fund Weighted Composite Index, hedge funds have seen returns this year through October of about 0.03 percent. This puts 2015 on track for the fourth-worst year of returns for hedge funds, after 2002, 2011 and 2008.

But Jonathan Rhinesmith, doctoral candidate in economics at Harvard University, said the biggest buys for hedge funds have a tendency to go up, and stay up.

"My research has found that at least historically, hedge funds have actually done pretty well, especially when you make that comparison to a monkey throwing darts," Rhinesmith said, referring to the trope implying that a portfolio of stocks chosen by a monkey randomly throwing darts at a paper would outperform a fund manager's personal picks.

Rhinesmith's paper, "Conviction and volume: Measuring the information content of hedge fund trading," analyzes $4.3 trillion in purchases of equity positions. Based on filings with the Securities and Exchange Commission, he found that the stocks that hedge funds took the biggest positions in tend to increase in price the most, and maintain higher prices even as firms exit large trades.

Since these stock picks outperform overall in the longer term, gains from hedge funds positions shouldn't be solely attributable to temporary price pressure due to the large trade itself, Rhinesmith said.

"Hedge funds do in fact predict future stock returns when they take up a lot of volume in stocks. And not only that, but the the returns that they predict don't revert," he said in an interview with CNBC's "Trading Nation.""By that measure, hedge funds are actually pretty informed. Furthermore, they even predict earnings returns in stocks."

In another paper, Rhinesmith takes a look at "doubling down," in which fund managers take another large stake in an existing position even after the stock has underperformed. He found that the greater the losses before doubling down, the more that position tended to outperform. This could indicate that when a hedge fund has a great deal of conviction on a stock, that stock will actually tend to do well, which is more evidence that hedge funds hold relevant information of a stock's value.

Despite that relevant knowledge, this rarely happens, Rhinesmith writes, because investment managers are reluctant to add to losing positions and risk their careers.

Unfortunately for other investors, those looking to follow in a hedge fund's footsteps may not find much outperformance. According to Rhinesmith, trades executed based on filings that list a fund's holdings will likely be late to the game.

"By the time these filings are made publicly available, hedge funds have actually already moved prices so much that there's not as much juice in the trade," he said.

The bright side, however, is that this implies that hedge fund purchases bring share prices closer to their "fundamental value," meaning that hedge funds end up improving the pricing of stocks bought and sold by less-informed investors.

Bill Gross has never hidden his dislike for central-bank stimulus. But in his latest investment outlook, the bond guru doubled down, calling central banks “casinos” that “print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem.”

The billionaire bond investor has made the point before that record-low interest rates as a result of ultraloose monetary policy by central banks across the globe are distorting financial markets.

In his December investment outlook for Janus Capital Group Inc. released Thursday, Gross drew parallels between today's global monetary policy and a foolproof betting system known in gambling circles as the Martingale.

Martingale theorizes that if you lose one bet, you just double the next one to get back to even; but if you lose that one you do it again and again until you win.

“Given an endless pool of ‘chips’, the theory is nearly mathematically certain to succeed, and in today’s global monetary system, central bankers are doing just that,” Gross said.

“I used to call it ‘double up to catch up’ at my fraternity’s poker table where I was consistently frustrated (loser)—not because I used Martingale but because I wasn’t a good bluffer. Today’s central bankers use both tactics to their success—at least for now. They bluff or at least convince investors that they will keep interest rates low for extended periods of time and if that fails, they use Quantitative Easing with a Martingale flavor,” Gross wrote.

But this is bound to fail, he said.

“As gamblers know, there isn’t an endless stream of Martingale chips—even for central bankers acting in unison. One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices, and investors will look around like Wile E. Coyote wondering how far is down,” Gross said.

As for investors, Gross warned that 2016 is a time to take risk off the table.

“Less credit risk, reduced equity exposure, placing more emphasis on the return of your money than a double digit return on your money,” Gross wrote.

“Even Martingale casinos eventually fail. They may not run out of chips but like Atlantic City, the gamblers eventually go home, and their doors close,” he added.

Gross left Pacific Investment Management Co., or Pimco, last year in a cloud of acrimony, setting up shop at Janus where he runs the Janus Global Unconstrained Bond Fund. He’s subsequently struggled with a volatile performance and outflows.

In October Gross sued Pimco for at least $200 million for the damage that was done to his reputation in the year before and after he was fired from Pimco.

Last month, Pimco asked a California court to throw out the lawsuit saying the complaint is “legally groundless” and a “sad postscript” to a storied career.

Bill Gross, the closely watched bond investor, on Thursday said low interest rates are keeping alive "zombie corporations" that are unproductive and warned investors to de-risk portfolios into the new year.

Gross, who oversees the $1.4 billion Janus Global Unconstrained Bond Fund, has said since earlier this year that the U.S. central bank should raise interest rates to more normal levels as zero-bound levels are harming the real economy and destroying insurance company balance sheets and pension funds.

"The faster and faster central bankers press the monetary button, the greater and greater the relative risk of owning financial assets," Gross wrote in his December Investment Outlook. "I would gradually de-risk portfolios as we move into 2016. Less credit risk, reduced equity exposure, placing more emphasis on the return of your money than a double digit return on your money."

Gross warned that the negative feedback loop from the real economy "will halt the ascent of stock and bond prices and investors will look around like Wile E. Coyote wondering how far is down." Wile E. Coyote, the famous cartoon character, was forever leaping across wide chasms in pursuit of the Road Runner, flying long distances in thin air, but then looking down and falling off a cliff.

Gross likens central banks to casinos. "They print money as if they were manufacturing endless numbers of chips that they'll never have to redeem. Actually a casino is an apt description for today's global monetary policy."

"Japan for years has doubled down on its Quantitative Easing and Mario Draghi's statement of several years past, 'Whatever it takes'– is a Martingale promise in disguise," Gross said. Martingale is a gambling system of continually doubling the stakes in the hope of an eventual win that must yield a net profit.

The "Martingale promise" vows to get the Euroland economy back to even and inflation up to 2.0 percent by increasing QE and the collateral it buys until the Euro currency declines, the euro zone economy improves and inflation approaches target, Gross said.

Artificially low interest rates have kept alive "zombie corporations that are unproductive" and destroy business models such as insurance companies and pension funds because yields are too low to pay promised benefits, Gross said. "They turn savers into financial eunuchs, unable to reproduce and grow their retirement funds to maintain expected future lifestyles."

Economists Kenneth Rogoff and Carmen Reinhart label this "financial repression," Gross said.

Conspiracy theorists have no shortage of ideas about who runs the world, which secret cabal is meeting in private to count cash and pull strings: the Bilderberg Conference, maybe, or the Trilateral Commission, or even Yale’s Skull and Bones society.

But in investing, the answer isn’t so sinister, nor is it even a secret. In fact, on this chilly autumn day, you can find a cadre of financial lever pullers walking the halls of downtown Toronto’s Ritz-Carlton Hotel, clutching their morning cups of coffee and slipping discreetly into meeting rooms: the world’s top pension-fund managers. Collectively the investors who gathered for the International Pensions Conference—among them, fund managers from the U.S., U.K., Canada, the Netherlands, and Japan—are stewards of $2.5 trillion, a very significant chunk of the world’s assets.

Circulating through this crowd is Ron Mock, head of the Ontario Teachers’ Pension Plan. The avuncular, unassuming 62-year-old “host CEO,” his name tag reads—is moderating panels and introducing guest speakers; he also has the distinction of offering opening and closing remarks. Mock has a modest mien befitting a lifelong usher at Toronto’s Maple Leaf Gardens arena. But among fellow pension managers, Mock might as well be strutting around like Mick Jagger. After all, he sits at the helm of a pension plan whose track record and revolutionary approach to investing have set benchmarks for just about anyone who manages a major endowment or pension fund.

Mock’s Ontario Teachers’ Pension Plan, widely known as “Teachers,” manages a hefty $154 billion Canadian ($116 billion) in assets. It represents the collective savings of 129,000 retired Ontario teachers and 182,000 currently active ones. It’s one of the most successful plans as well, with double-digit average annual returns since 1990, including an 11.8% return in 2014 (about four percentage points better than Canada’s TSX index). Over the past 10 years, according to Toronto-based pension-fund analysis firm CEM Benchmarking, Teachers has placed among the top two performers in the world—out of 273 funds managing a total of $8.5 trillion.

So what the hell is going on north of the 49th parallel? These unassuming investors have a secret sauce that has been so successful, for so long, that pension experts have dubbed it “the Canadian model.” Canadian-model investing means minimizing passive stocks-and-bonds portfolios and buying sizable direct stakes—in companies, in infrastructure, in property. It also means running a pension fund as an independent business: no handing management reins to political cronies, no farming out research to expensive outside advisers. It means bringing in top pros and paying them handsomely, the better to keep them on board. And in Teachers’ case, it means higher-than-average returns paired with lower-than-average risk.

Of course, none of this is any guarantee of success. And although you presumably don’t have $100 billion or more to manage, chances are that you and the Teachers team are grappling with some of the same challenges: the financial strain that comes with growing longevity, as retirement assets stretch to cover 25 or 30 years of living expenses; the difficulty of investing for a long time horizon in an investing climate that emphasizes short-term results; and the fact that, after a six-year global bull market, too many assets are just too expensive. Indeed, Mock and his team are earnestly scouring this pension conference for new strategic ideas. “Market valuations are high, and there’s a lot of capital chasing every opportunity,” laments Jane Rowe, one of Teachers’ top managers.

Still, the Teachers crew has every reason to believe that sticking to the method will pay off. “If you execute the Canadian model correctly—and there is 20 years of data on this—
it is worth an extra 2% every year,” says Keith Ambachtsheer, founding director of Canada’s International Centre for Pension Management. “Compound that every year, and then look at your returns.”

Pension experts credit Teachers with originating this approach a quarter century ago, in 1990—before then the fund was little more than a collection of dusty provincial bonds. Since then Teachers has become the pacesetter for the industry, as more public-pension plans say, to paraphrase When Harry Met Sally, “I’ll have what they’re having.” “The Koreans are doing it, the Singaporeans are doing it, the Dutch are doing it,” says Larry Schloss, president of alternative-asset managers Angelo, Gordon & Co. and former chief investment officer of New York City’s pension plans. “All the largest sovereign funds are trying to do it. The Canadians have figured it out—and they have the returns to prove it.”

Ron Mock didn’t invent the model—he joined Teachers in 2001 and took the helm on Jan. 1, 2014—but he’s well aware of its influence. “Back in 2000 there were only a handful of players on the planet like us,” says Mock, an electrical engineer by training who used to be in charge of safety at nuclear plants (no Homer Simpson jokes, please). “Now there might be 150 of them. People watched where we went and what we did, and suddenly our approach became very popular.”

That popularity is forcing Mock and his colleagues to up their game. While Teachers used to be virtually alone among pension funds in scouring the world for innovative private deals, now it has serious competition. Trying to figure out those critical next steps: 1,100 Teachers employees, many of them housed in a nondescript office building in Toronto’s North End.

Mock is “very smart, he’s very savvy, and he hires investment people who fit that mold,” says Chris Ailman, chief investment officer for Calstrs, the $181 billion fund managing the pensions of California teachers. “His real challenge is that he inherited a dynasty that has been successful for decades, like the New York Yankees. What do you do next?”

To get a sense of how far-reaching Teachers’ strategy is, consider the myriad ways it might overlap with your daily life.

The next time you eat at an Applebee’s or a Taco Bell, for instance, you may well be interacting with Teachers, via its investment in the $1.7 billion San Francisco–based franchisor Flynn Restaurant Group. If you go to a laundromat (Alliance Laundry Systems) or take your pet to an animal hospital (PetVet Care Centers) or buy a bag of kettle-cooked potato chips (Shearer’s Snacks) or keep stuff in storage (Portable On-Demand Storage) or park your car in a pay lot (Imperial Parking) or go to the dentist (Heartland Dental Care) or buy a suit (Hugo Boss) or go the gym (24-Hour Fitness) or wear outdoor gear (Helly Hansen), you’re crossing paths with Teachers’ investments.

And that’s just within the U.S. If you’ve ever traveled through airports in Copenhagen or Brussels, or Birmingham or Bristol in England, or taken the high-speed train connecting London with the Channel Tunnel, you’ve been sending a few bucks to Ontario Teachers. If you shop in any large Canadian mall, you’re probably setting foot in part of a Teachers-owned real estate portfolio. Oh, and the Ritz-Carlton where I recently sat with Mock, Teachers co-owns that particular one, along with Ritz-Carlton itself, through Teachers’ $28 billion Cadillac Fairview real estate operations.

Of course, lots of portfolio managers can claim similar breadth. Many mutual funds, in both actively managed and index forms, have hundreds or even thousands of stock holdings. But few can claim the operational influence that Teachers has on the companies it invests in.

In a conversation in a Toronto boardroom, two of Teachers’ heaviest investment hitters walk Fortune through the fund’s process. The two are very, well, Canadian. Mike Wissell heads Teachers’ public equities investing, when he’s not taking his kids to hockey practices or cheering Blue Jays games at the SkyDome. Jane Rowe, who runs the fund’s private equity arm, has a boast-worthy track record—Teachers’ private equity holdings have averaged annual returns of 19.7% since 1991 and are now valued at $21 billion Canadian—but she’s more likely to reminisce about Newfoundland and getaways to her cottage in Ontario’s Muskoka region.

Still, as pleasant as they seem, Wissell and Rowe send a clear message that Teachers’ money is not to be messed with. If the fund buys a stake in your private firm, they explain, it would like to help call the shots. No 5% or 10% slice, thanks; more likely it will shell out for 30%, 40%, 50%, or more. Oh, and Teachers will want a board seat. Did they mention that? “It’s not unusual for us to have absolute control,” says Rowe. “That is very rare in the pension-plan world.”

If Teachers takes a stake in your company, and it doesn’t like what it sees, big changes may come and management heads may roll. When Teachers pushed McGraw-Hill to split up its business—well, it split up its business, in 2011. Teachers supported hedge fund rabble-rouser Bill Ackman in his battle with CP Rail, leading to the departure of CEO Fred Green in favor of E. Hunter Harrison in 2012. The fund also objected to what it saw as excessive compensation of top management at Sprint Nextel, contributing to the replacement of CEO Dan Hesse by Marcelo Claure.

“It is the most proactive pension fund in Canada,” says John Coffee, a law professor and corporate-governance expert at Columbia University. “It is activist—but hardly the most aggressive.” Indeed, there’s a marked difference in style between Teachers and many American activists: While the latter often take their campaigns public, making themselves part of the narrative, Teachers does its talking behind closed doors, says Ambachtsheer, the pension expert.

Teachers’ managers insist they don’t seek control for its own sake but in order to grow their business. And their successes show their impact. When the fund bought out vitamin giant GNC in 2007, it helped GNC expand into new markets and prepped the company for its IPO before selling out in 2012—having made five times its original investment. When it bought Alliance Laundry from Bain Capital in 2005, Teachers replaced the CEO and made key acquisitions—and has since scored a return of eight times its money. And when Teachers sold its 80% stake in Maple Leaf Sports and Entertainment, owner of hockey’s Toronto Maple Leafs, it got a princely $1.32 billion. Teachers had originally bought half the company, in 1994, for just $44 million—building it into a powerhouse with additions like basketball’s Toronto Raptors.

Of course, assuming big stakes also means assuming sizable risks. “You won’t meet anyone here who doesn’t have some tragic investment story,” admits Wissell. One stands out in company lore: its very first private-capital investment, White Rose Crafts and Nursery Sales, bought in 1991 for $15.75 million. Teachers foresaw grand things for the home-and-garden chain; it didn’t foresee the hit the company would take from surging competitors like Walmart Canada and Costco Wholesale. Within a year, White Rose had folded. Laments Mock: “Bankruptcy right out of the gate.”

Mock knows something about bouncing back from embarrassing adversity. After his stint at Ontario’s nuclear plants, he earned an MBA and started working for the investment dealer now known as BMO Nesbitt Burns. Eventually he became head of a hedge fund, Phoenix Research and Trading. In 2000 the fund tanked, wiping out $125 million in assets. Regulators found that a rogue trader was at fault for having amassed unapproved bond positions. Since Mock was head of the firm, though, the buck stopped with him. He was reprimanded by the Ontario Securities Commission for lack of oversight and was barred for years from becoming a public-company director or officer.

Given that car crash, it is perhaps surprising that Mock was hired the year after by Teachers. Commissioned to steer its alternative assets, he rewarded the trust he’d been given by launching initiatives like Ole, a music-rights-management company that now owns the lucrative catalogues of artists like Rush and Timbaland. He was given the keys to the fund entirely in 2014, when he became the plan’s president and CEO, with former head Jim Leech praising Mock’s appointment as “outstanding.”

“I learned a lot from that experience,” Mock says of the Phoenix flameout. “People will be people. But you have to have a governance structure in place to prevent those things from happening. As the adage goes, trust—but verify.”

In the U.S., trust in public-pension programs is in short supply, and understandably so. Teachers is a fully funded plan, with enough cash on hand to meet 104% of its payment obligations. In comparison, the funding ratio for state and local pension plans in the U.S. is a worrisome 74%, according to Boston College’s Center for Retirement Research.

Much of the U.S. shortfall reflects shortsighted decisions by governments to underfund their pensions, often in unfounded hope that sky-high investment returns would make up the difference. But critics say U.S. funds’ performance also suffers from meddling in investment decisions by political appointees, from restrictions on the kinds of investment strategies they can pursue—and, often, from exorbitant fees charged by advisers.

When Teachers started stacking wins, other plans started following its lead, with the Canada Pension Plan ($264.6 billion Canadian), the Ontario Municipal Employees Retirement System ($72 billion Canadian), and the Caisse de Dépôt et Placement du Québec ($225.9 billion Canadian) adopting similar philosophies. The Canadian model crossed the border as well. The Teacher Retirement System of Texas ($132.8 billion), Calstrs ($191.4 billion), and the Florida State Board of Administration ($170 billion) have all been singled out for their maple-flavored approach.

But U.S. managers say they’d like to go even further in Teachers’ direction. Hampered by traditional U.S. pension-fund rules, they feel as though they’re in a fistfight with one hand tied behind their backs. Among the problems, they say, is relatively modest manager compensation. “The Canadian model pays their in-house team much closer to market compensation than their American counterparts,” says Schloss, the former New York City official. “When I was CIO for NYC pension funds, I made $224,000. Meanwhile, a first-year associate at J.P. Morgan right out of business school made $300,000.” In contrast, Mock made a cool $3.62 million Canadian in 2014, followed closely by executive vice president of investments Neil Petroff, who earned $3.56 million Canadian, according to Teachers’ annual report.

While some U.S. pensions stand out for Canadian-style independence, the model has proved a challenging transplant. “I fear that it will take a crisis, like the Titanic hitting the iceberg, before we do anything about it,” says Calstrs’s Ailman. “Until then we all just keep banging our head against the wall trying to make our current system work.”

While publicly run American funds look on longingly, other funds have no such limitations—and that’s where Teachers’ managers are finding the stiffest competition. Mammoth university endowments like those of Harvard and Yale, and sovereign government funds from Abu Dhabi to Norway are all open to alternative assets and private ventures—and much more active in those spaces than they were when Teachers got started. And all of them share Teachers’ ability to write $500 million checks.

That’s where Teachers hopes its 20-year headstart comes in handy. It already has tentacles all over the world, with outposts in Hong Kong and London expanding to enable more boots on the ground. In its hunt for cash flow, the fund is increasingly deploying those boots in infrastructure deals. Toll roads, airport services, high-speed trains? Count Teachers in. As Mock quips, “If you’re selling an airport, I can get 15 people on a plane tomorrow.”

The sector is decidedly unsexy, but it now makes up $12.6 billion of its portfolio. Infrastructure hits a sweet spot for managers who need to pay for teacher pensions 50, 60, or 70 years out. Like the utility or railroad properties in Monopoly, they may not be marquee venues—but they are consistent, underrated revenue streams. Not long after Fortune met with Teachers’ leaders, the fund announced a deal to buy a one-third stake in the Chicago Skyway, a toll road that accommodates some 17 million passenger cars a year. For $512 million upfront, Teachers will get a share of tens of millions annually in toll income through the year 2104. The rationale is right out of Teachers’ basic playbook: It’s a “critical asset” that “will provide inflation-protected returns to match our liabilities,” says Andrew Claerhout, Teachers’ senior vice president of infrastructure.

The Skyway deal stands out for another reason: It’s one of the few big buys Teachers has made recently. After years of rising prices, in assets from North American real estate to the Dow Jones industrial average, today’s valuations make the fund’s managers nervous. While Teachers declined to comment on which asset classes look intriguing, every interviewee brought up the flood of global capital chasing limited opportunities. You get the sense they are waiting for the fever to break and for prices to come back down to earth.

In the meantime they are doing bottom-up research, unwilling to overpay. “Our bosses always tell us we don’t have to do anything,” says Wissell. “It’s okay to wait for the softballs.” Finding softballs is hard work: That’s why Jane Rowe just got back from Greenland, and Wissell from Brazil, as they scoured the globe for revenue streams. But no matter how far Teachers’ managers travel, you can’t take the Canada out of them. “We are very proud of the Canadian model,” says Wissell. “But we don’t scream it to the highest rafters. It’s just not our way.”

Telecoms group BT has pulled an £8.4bn investment mandate from Hermes, the asset manager it owns, in an attempt to reduce the costs of running its £40bn pension scheme.

BT’s decision will mean that total assets run by Hermes, the fund company BT created in 1983 to manage its pension scheme, will slide almost 30 per cent to £21.7bn.

The shift comes as BT struggles to plug the funding gap of its pension scheme. There is growing pressure on pension funds to reduce their costs of investment.

BT’s pension deficit increased from £5.8bn to £7bn in the 12 months to the end of 2014 and is the highest of any FTSE 100 company, according to consultancy LCP.

BT said in a statement: “We have made the decision to move the mandate . . . as this best meets the needs of the scheme and will be more cost effective going forward.”

The telecoms company will run the £8.4bn inflation-linked government bond mandate passively using a strategy that tracks the benchmark, rather than the more expensive active management strategy used by Hermes to beat the market.

John Ralfe, an independent pension consultant, said: “Index-linked gilts are by definition entirely inert. Therefore the idea that you pay anybody for managing them — even a passive manager — doesn’t make any sense.

“BT shareholders paying two people to sit around actively managing a gilt portfolio [is] just money down the drain.”

Mr Ralfe said it did not make sense to pay for active management of an inflation-linked gilt strategy as these tended to be buy-and-hold investments that did not require much trading.

He believed active management was too costly, and passive investments tended to outperform active equivalents on average.

Hermes’ main actively managed gilts strategy underperformed its benchmark by 47 basis points in 2014 and has underperformed since it was launched, according to the company’s annual report. Hermes said some accounts with that strategy — including BT’s scheme — performed better.

BT said in a statement: “Hermes has delivered strong performance for this mandate and across the portfolios they manage for us.”

Although the bond mandate made up almost 30 per cent of assets at Hermes, it accounted for just 3 per cent of revenues, according to the company’s chief executive Saker Nusseibeh.

He said: “When I joined the company in 2009, 92 per cent of revenues came from BT but that is now less than half. Fifty seven per cent of our revenues come from third parties. This loss absolutely does not affect our other mandates with BT.”

Mr Nusseibeh added that Hermes, which made a statutory loss of £8.1m last year but is forecast to make a £9.2m profit this year, had “entered into discussions” with Paul Oliver and Paul Syms, who were managing the bond mandate at Hermes on behalf of BT, about their future at the company.

The BT pension fund is likely to shift other active mandates into cheaper, passive alternatives, according to Mr Ralfe.

Around half of the scheme’s £40bn of assets are allocated to external fund companies, including active investment managers Ashmore, M&G and Wellington, as well as BlackRock, the world’s largest provider of passive funds.

Mr Ralfe said: “Over the years, [the scheme’s board] has moved some assets into passive. That may well continue. There’s a hell of a lot of money to be saved [in passive].”

Hermes, the investment manager set up by the BT pension fund, is losing 30pc of its assets after the telecoms giant decided to take part of its portfolio in-house.

Hermes said that the decision by its owner would affect its £8.4bn government bond mandate, which will be switched from active management to a cheaper, passive strategy that simply tracks the benchmark.

Saker Nusseibeh, chief executive of Hermes, said the BT Pension Scheme’s decision was expected and should not affect the rest of the firm’s mandates with the telecoms group. “We knew that our client was unusual in having an actively-managed gilt business. The performance of it had been stunning… but I wasn’t particularly surprised.

“The effect on our financials will be de minimis,” he added, noting that the mandate represented just 3pc of Hermes’ revenues.

Hermes will continue to manage between 30pc and 40pc of BT’s pension assets in future, BT said.

BT founded Hermes in 1983 and is still the group’s largest client, with a mandate to help fund retirement obligations for 320,000 workers. The telecoms firm, which uses several investment managers to run its pension holdings, said in early 2015 that it would inject £2bn into its pension funds over the next two years and reduce its costs in a bid to scale back its £7bn deficit.

Meanwhile, Hermes has recently diversified and increased revenues from third parties from 18pc in 2011 to more than 50pc this year. Its assets under management rose 9pc to £27.5bn last year, although the firm’s statutory losses widened to £8.1m.

The investment manager has also ventured into private equity and infrastructure deals, such as a joint venture with the Canada Pension Plan to acquire Associated British Ports, and has launched several new funds.