The nation’s second-largest public pension posted its slimmest returns since the 2008-2009 financial crisis because of heavy losses in stocks.

The California State Teachers’ Retirement System, or Calstrs, earned 1.4% for the fiscal year ended June 30, according to a Tuesday news release. The result is the lowest since a 25% loss in fiscal 2009 and well below Calstrs’ long-term investment target of 7.5%. Calstrs oversees retirement benefits for 896,000 teachers.

The soft returns by Calstrs, which manages $189 billion, foreshadow tough times for other U.S. pension plans as they grapple with mounting retirement obligations and years of low interest rates. On Monday the largest U.S. pension, the California Public Employees’ Retirement System, said it earned 0.6% on its investments. Other large plans are posting returns in the low single-digits.

Calstrs did report big gains in real estate and fixed income. But its holdings of U.S. and global stocks—which represent more than half of its assets—declined by 2.3%.

The fund earned 2.9% on its private-equity investments, falling short of its internal benchmark by 1.7 percentage points. Real estate rose 11.1% but lagged behind the internal target.

Calstrs investment chief Christopher Ailman said the fund’s portfolio “is designed for the long haul and “we look at performance in terms of decades, not years.”

Over the past five years, Calstrs has posted returns of 7.7%. But the gain drops to 5.6% over 10 years and 7.1% over 20 years.

The California State Teachers’ Retirement System, the second-largest U.S. public pension fund, earned 1.4 percent in the 12 months through June, missing its return target for the second straight year.

Calstrs seeks to earn 7.5 percent on average over time to avoid falling further behind in its obligations to 896,000 current and retired teachers and their families. The fund, which had $188.7 billion in assets as of June 30, averaged returns of 7.8 percent over the last three years, 7.7 percent over five years, 5.6 percent over 10 years and 7 percent over 20 years.

“The Calstrs portfolio is designed for the long haul,” Chief Investment Officer Christopher Ailman said Tuesday in a statement. “We look at performance in terms of decades, not years. The decade of the 2010s has so far been a good performer, averaging 10.3 percent net.”

U.S. pension funds have struggled to meet investing goals amid stock volatility, shrinking bond returns and slowing emerging-market growth at a time when retirees are living longer and health-care costs are rising. Long-term unfunded liabilities may ultimately need to be closed by higher employee withholding rates, reduced benefits or bigger taxpayer contributions.

The California Public Employees’ Retirement System, the nation’s largest pension fund with $302 billion in assets, earned 0.6 percent for the latest fiscal year, according to figures released Monday. Calpers trails its assumed annualized 7.5 percent rate of return for the past three-, five-, 10-, 15- and 20-year periods.

Calstrs and Calpers are bellwethers for public pension funds because of their size and investment approach. Both have pressured money managers to reduce fees while also using their influence as shareholders to lobby for environmental, social and corporate-governance reforms.

Calstrs returned 4.8 percent in the previous fiscal year after gaining 19 percent in 2014. Over the last decade, the teacher system’s returns ranged from a 23 percent gain in 2011 to a 25 percent loss in 2009.

Asset Allocation

The fund’s investments in stocks fell 2.3 percent last year, while fixed income and real estate both rose 11 percent and private equity increased 2.9 percent. As of June 30, Calstrs had about 55 percent of its assets in global stocks, 17 percent in fixed-income, 14 percent in real estate, 8.7 percent in private equity with the balance in cash and other financial instruments.

While Calstrs outperformed its benchmark index for equities by 0.2 percent last year, its returns trailed in every other category.

Since 2014, Calstrs’s unfunded liability has grown an estimated 27 percent to $69.2 billion while Calpers’s gap has increased 59 percent to $149 billion, according to Joe Nation, a professor of the practice of public policy at Stanford University. Both retirement systems’ assumptions of 7.5 percent returns are based on wishful thinking, he said.

“The assumption is we’re going to have a period like the 1990s again,” Nation said. “And there are very few people who believe that you’ll get the equity returns over the next five or 10 years that we saw in the 1990s.”

While U.S. financial conditions and economic data have improved lately with consensus-topping June figures for employment, industrial output and retail spending, that’s not to say the Fed is ready to resume rate hikes. Brexit has raised downside risks to global economic growth and the FOMC will appreciate the potential spillover effects to the U.S. economy. But perhaps more concerning to the Fed is that its persistent failures to hit its inflation target ─ for four consecutive years now, the annual core PCE deflator has been stuck well below the Fed’s 2% target ─ is starting to disanchor inflation expectations. 

As today’s Hot Charts show, both survey-based and market-based measures are showing sharp declines in inflation expectations. The University of Michigan survey even shows the lowest ever quarterly average for long-term inflation expectations. So, while markets are now pricing in a decent probability of a Fed interest rate hike later this year, we remain of the view that the FOMC should refrain from tightening monetary policy until at least 2017.

The California State Teachers’ Retirement System remains on track for full funding by the year 2046 after announcing today that it ended the 2015-16 fiscal year on June 30, 2016 with a 1.4 percent net return. The three-year net return is 7.8 percent, and over five years, 7.7 percent net.

The overall health and stability of the fund depends on maintaining adequate contributions and achieving long-term investment goals. The CalSTRS funding plan, which was put in place in June 2014 with the passage of Assembly Bill 1469 (Bonta), remains on track to fully fund the system by 2046.

CalSTRS investment returns for the 2015-16 fiscal year came in at 1.4 percent net of fees. However, the three-and-five year performance for the defined benefit fund still surpass the 7.5 percent average return required to reach its funding goals over the next 30 years. Volatility in the equity markets and the recent June 23 U.K. referendum to exit the European Union, also known as Brexit, left CalSTRS’ $188.7 billion fund about where it started the fiscal year in July 2015.

“We expect the contribution rates enacted in AB 1469 and our long-term investment performance to keep us on course for full funding,” said CalSTRS Chief Executive Officer Jack Ehnes. “We review the fund’s progress every year through the valuation and make necessary adjustments along the way. Every five years we’ll report our progress to the Legislature, a transparency feature valuable for any such plan.”

The 2015-16 fiscal year’s investment portfolio performance marks the second consecutive year of returns below the actuarially assumed 7.5 percent. Nonetheless, CalSTRS reinforces that it is long-term performance which will make the most significant impact on the system’s funding, not short-term peaks and valleys.

CalSTRS continues to underscore and emphasize the long-term nature of pension funding as it pertains to investment performance and the need to look beyond the immediate impacts of any single year’s returns. And although meeting investment assumptions is very important to the overall funding picture, it is just one factor in keeping the plan on track. Factors such as member earnings and longevity also play important roles.

“Single-year performance and short-term shocks, such as Brexit, may catch headlines but the CalSTRS portfolio is designed for the long haul. We look at performance in terms of decades, not years,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “The decade of the 2010s has so far been a good performer, averaging 10.3 percent net.”

CalSTRS’ net returns reflect the following longer-term performance:

• 7.8 percent over three years
• 7.7 percent over five years
• 5.6 percent over 10 years
• 7.1 percent over 20 years

Fiscal Year 2015–16 Returns (Net of Fees) and Performance by Asset Class (click on image):

As of June 30, 2016, the CalSTRS investment portfolio holdings were 54.8 percent in U.S. and non-U.S. stocks, or global equity; 16.9 percent in fixed income; 8.7 percent in private equity; 13.9 percent in real estate; 2.8 percent in inflation sensitive and absolute return assets; and 2.9 percent in cash.

About CalSTRS

The California State Teachers’ Retirement System, with a portfolio valued at $188.7 billion as of June 30, 2016, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 896,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts.

• Just like CalPERS and other large public pensions with a large asset allocation to global equities, CalSTRS has a lot of beta in its portfolio. This means when global stocks take a beating or slump, their Fund will underperform pensions with less beta in their portfolio (like CPPIB, PSP, Ontario Teachers, etc.). Conversely, when global stocks soar, they will outperform these pensions. But when stocks get hit, all pensions suffer in terms of performance (some a lot more than others).
• Also similar to CalPERS, Private Equity had meager returns of 2.9%, underperforming its benchmark which returned 4.6%. CalPERS's PE portfolio returned less (1.7%) but outperformed its benchmark by 253 basis points which signals "benchmark gaming" to me. You should all read Yves Smith's comment, CalPERS Reported That It Made Less in Private Equity Than Its General Partners Did (Updated: As Did CalSTRS), to get more background and understand the key differences. One thing is for sure, my comment earlier in November 2015 on a bad omen for private equity was timely and warned all you the good days for PE are over.
• CalSTRS's performance in Real Estate (11.1%) significantly outperformed that of CalPERS (7.1%) but it under-performed its benchmark which returned 12.6%. Note that CalPERS  realized losses on the final disposition of legacy assets in the Opportunistic program which explains this relative underperformance. 
• More interesting, however, is how both CalPERS and CalSTRS use a real estate benchmark which reflects the opportunity cost, illiquidity and risk of the underlying investments. I'm mentioning this because private market assets at CalPERS and CalSTRS are valued as of the end of March, just like PSP and CPPIB. But you'll recall I questioned the benchmark PSP uses to value its RE portfolio when I went over its fiscal 2016 results and this just makes my point. Again, this doesn't take away from PSP's outstanding results in Real Estate (14.4%) as they beat the RE benchmark CalPERS and CalSTRS use, just not by such a wide margin. 
• Fixed Income returned less at CalSTRS (5.7%) than at CalPERS (9.3%) but it uses a custom benchmark which is different from that of the latter. Still, with 17% allocated to Fixed Income, bonds helped CalSTRS buffer the hit from global equities.
• Inflation Sensitive Assets returned 4.2% but CalSTRS doesn't break it down to Infrastructure, Natural Resources, etc. so I can't compare it to CalPERS's results.
• Absolute Return returned a pitiful 0.2%, underperforming its benchmark by 100 basis points (that benchmark is low; should be T-bills + 500 or 300 basis points). Ed Mendell wrote a comment, As CalPERS Exits Hedge Funds, CalSTRS Adds More, explaining some of the differences in their approach on hedge funds. CalSTRS basically just started investing in large global macro and quant funds and squeezes them hard on fees. The party in Hedge Fundistan is definitely over and while many investors are running for the exits, most stay loyal to them, paying outrageous fees for mediocre returns.

Ray Dalio, the billionaire founder of the world’s largest hedge fund, Bridgewater Associates, likes to say that one of his firm’s core operating principles is “radical transparency” when it comes to airing employee grievances and concerns.

But one employee said in a complaint earlier this year that the hedge fund was like a “cauldron of fear and intimidation.”

The employee’s complaint with the Connecticut Commission on Human Rights and Opportunities, which has not been previously reported, describes an atmosphere of constant surveillance by video and recordings of all meetings — and the presence of patrolling security guards — that silence employees who do not fit the Bridgewater mold.

Hedge funds tend to be a highly secretive bunch, yet even within their universe Bridgewater stands out. The allegations, as well as interviews with seven former employees or people who have done work for the firm and a filing by the National Labor Relations Board, open a window into the inner workings of a $154 billion company that, despite its mammoth size, remains obscure. The firm is governed by “Principles” — more than 200 of them — set out in a little white book of Mr. Dalio’s musings on life and business that some on Wall Street have likened to a religious text.

Secrecy at Bridgewater is so tight that in some units employees are required to lock up their personal cellphones each morning when they arrive at work.

In his complaint, Christopher Tarui, a 34-year-old adviser to large institutional investors in Bridgewater, contends that his male supervisor sexually harassed him for about a year by propositioning him for sex and talking about sex during work trips.

After he complained last fall, Mr. Tarui said, several Bridgewater top managers confronted him and sought to pressure him to rescind his claims. One manager, he said, accused him of lying and said that he was “blowing this whole thing out of proportion.” These and other allegations in the complaint could not be independently verified.

Mr. Tarui said he remained silent for many months about the harassment out of fear the incident would not remain private and would impede his chances for promotion at the firm, which is based in Westport, Conn. “The company’s culture ensures that I had no one I could trust to keep my experience confidential,” he said in the complaint, which was filed in January.

Jointly, Bridgewater and Mr. Tarui asked in March to withdraw the complaint from consideration by the Connecticut human rights commission. No reason was given by either party for the request, which halted the investigation. Bridgewater’s employment agreement requires employees to settle disputes through binding arbitration.

In a related action, the National Labor Relations Board recently filed a separate complaint against Bridgewater. The new complaint says that the company “has been interfering with, restraining and coercing” Mr. Tarui and other employees from exercising their rights through confidentiality agreements that all employees are required to sign when they are hired.

Both Mr. Tarui’s harassment complaint and the labor board’s filings were obtained by The New York Times through Freedom of Information Act requests.

“While it is difficult for our management team to independently judge the merits of this claim, we are confident our handling of this claim is consistent with our stated principles and the law,” Bridgewater said in an emailed statement. “We look forward to operating through a legal process that brings the truth to light.”

Mr. Tarui’s assertions about Bridgewater’s surveillance culture and its chilling effect were echoed in interviews with seven people who are former employees or who have done work for the firm. The people were not permitted to speak publicly because of the confidentiality agreements they had signed with Bridgewater.

It is routine for recordings of contentious meetings to be archived and later shown to employees as part of the company’s policy of learning from mistakes. Several former employees recalled one video that Bridgewater showed to new employees that was of a confrontation several years ago between top executives including Mr. Dalio and a woman who was a manager at the time, who breaks down crying. The video was intended to give new employees a taste of Bridgewater’s culture of openly challenging employees and putting them on the spot.

The firm no longer shows the video, the people said.

These former employees said other behavior had raised concerns within the company. At an off-site retreat in 2012 with several top executives — including Greg Jensen, Bridgewater’s co-chief investment officer — employees got drunk and went swimming naked, prompting complaints from some other employees in attendance.

Founded in 1975, Bridgewater manages billions of dollars for some of the biggest pension funds and sovereign wealth funds in the world. Its founder, Mr. Dalio, 66, is a celebrity in his own right — he has been a speaker at exclusive conferences like the World Economic Forum in Davos, Switzerland, and recently attended a White House state dinner.

Steady performance for years has led institutional investors around the world to give Bridgewater money. For a time, James B. Comey, the current director of the Federal Bureau of Investigation, was the company’s general counsel, adding to its luster.

But over the last two years, the firm has lost billions of dollars for investors as a result of mixed performances and has begun to slow its hiring. And questions have arisen about Bridgewater’s unusual culture.

Mr. Tarui has been on paid leave from the firm since Jan. 6, two days before he filed his harassment complaint. The labor relations board said in its separate complaint that Mr. Tarui was suspended after he “threatened to file a charge with the board.”

Douglas Wigdor, Mr. Tarui’s lawyer, declined to comment and said his client would not comment.

Bridgewater, in a legal filing with the labor relations board, said its employment agreements were “tailored specifically to protecting Bridgewater’s legitimate business concerns, including confidentiality interests that are unique to the financial services industry.”

A Bridgewater employee for five years, Mr. Tarui was responsible for meeting with large public pension funds. He previously worked for Pimco, the bond giant based in Newport Beach, Calif.

In his complaint, Mr. Tarui said that the sexual advances began during a business trip to Denver in May 2014, when his supervisor “caressed the small of my back” while the two men were seated on a couch in the supervisor’s hotel room. Mr. Tarui said the incident made him feel uncomfortable and he immediately left the room.

But the supervisor continued to pursue him, Mr. Tarui said in his complaint. On one occasion, he said, his supervisor confided in him that he had an “itch to scratch,” and then asked Mr. Tarui whether he had ever “thought about being with other men.” Mr. Tarui said he told his supervisor he “was not wired that way.” But his supervisor persisted, Mr. Tarui said, adding that his boss then “specifically asked whether I would consent to having a sexual experience with him.”

Mr. Tarui said he again rejected his supervisor’s advances but his supervisor continued to make overt and subtle sexual overtures well into last summer.

Mr. Tarui said in the complaint that he did not report the conduct out of fear it would become public because of the firm’s policy of videotaping confrontations between employees.

Eventually, Mr. Tarui did complain after his supervisor gave him a bad job performance rating even though he had been promoted and given a pay raise just a few months earlier. He said in the complaint that during a meeting in November 2015, he told a Bridgewater human resources representative and another top manager about the repeated sexual harassment by the supervisor.

As is the case with every meeting at Bridgewater, the meeting was recorded. So was a later meeting with several top executives at Bridgewater including David McCormick, the firm’s president. Mr. Tarui said recordings from those meetings were “widely shared” with managerial employees at Bridgewater.

The firm promised an investigation. But in his complaint Mr. Tarui said that Bridgewater’s management tried to persuade him to withdraw his allegations.

Other Bridgewater employees have complained internally about unusual antics at a corporate outing, saying that it went beyond what was acceptable behavior at a work event.

After the 2012 retreat, which was attended by more than 30 employees, several who had attended complained that they had felt uncomfortable at the excessive drinking and skinny-dipping, three former employees said. The retreat also provoked internal quarreling because several people who attended poked fun at Mr. Dalio during a campfire, these same people said.

An employee who helped arrange the retreat was later fired by Bridgewater, these people said.

In January 2013, I openly asked whether the world's biggest hedge fund is in deep trouble, stating the following:

When I invested in Bridgewater over 13 years ago, it was just starting to garner serious institutional attention. Now, the whole world knows about Ray Dalio, Bob Prince and Bridgewater's approach. When I hear investors telling me investing in Bridgewater is a "no-brainer," I get very nervous and start thinking that the firm's success has become its worst enemy.

Let me be clear, I've met Ray Dalio, Bob Prince and many others from Bridgewater. There is no doubt they run a first-rate shop, striking the right balance, and deserve their place among the world's biggest and best hedge funds. But in this industry success is a double-edged sword and I don't like seeing hedge fund managers plastered all over news articles and engaging in silly deals.

Also, as I explained yesterday, there are good reasons to chop hedge fund fees in half, especially for these large quantitative CTAs and global macro funds. Why should Ray Dalio or anyone else managing over $100 billion get $2 billion in management fees? It's ridiculous and I think institutional investors should get together at their next ILPA meeting and have a serious discussion on fees for large hedge funds and private equity shops.

In my opinion, these large funds should charge no management fee (or negligible one of 25 basis points) and focus exclusively on performance. The "2 & 20" fee structure is fine for small, niche funds that have capacity constraints or funds just starting off and ramping up, but it's indefensible for funds managing billions as it transforms them into large, lazy asset gatherers, destroying alignment of interests with investors.

Now, one can argue that Bridgewater is becoming the next Pimco, a mega asset manager which successfully manages a lot more in assets. That's fine but then why charge 2 & 20?

Earlier this year, I criticized Bridgewater's radical transparency, stating the following:

[...] the bigger problem I have with this "radical" view of how people should interact in a company, especially a large hedge fund full of competitive individuals is on philosophical and ethical grounds. Let me explain. Ray Dalio may have mastered the machine but people aren't machines. His mechanistic/ deterministic view on markets and how the economy and world work cannot be translated into the way people should or can realistically interact with each other. 

In short, while you can code many relationships in the economy and financial markets, human interactions are far more complex. People aren't machines and when you try to impose some mechanistic deterministic view on how they should interact with each other (in order to control them?), you're bound to stifle creativity and breed contempt and an atmosphere of animosity, especially when the fund underperforms.

What else? I believe what ultimately matters is what Bridgewater employees are thinking and saying when the cameras and iPads are off or when they leave the shop. Bridgewater can tape all the meetings they want but Ray Dalio can't read minds and he doesn't know what is being said in private when employees are venting to each other or their partners at home (unless he's secretly taping them at the workplace and their homes, which is a sign of disrespect, not to mention it exhibits traits of a delusional paranoid tyrant).

Also, Gapper is right, there's an elitist (and narcissistic) air to all this. They hire a bunch of Ivy League kids and if after 18 months they manage to "get to the other side" of their emotions they then  become part of the Bridgewater "Navy SEALs," the select few who have mastered their emotions and are able to view things without their emotions getting in the way.

It's such nonsense and while it's great for marketing purposes, when the fund starts losing money, it exposes the shortcomings of this elitist mechanistic approach. Worse still, it leaves no room for real diversity at the workplace (how many people with disabilities does Bridgewater hire?) and you end up with a bunch of emotionally challenged robots at "the other end" who follow rules to conform to what their master wants, not because they truly believe or want to live by these ridiculous rules governing their every interaction.

Sure, Bridgewater is a great hedge fund, one of the best. But in my opinion, it's a victim of its success and it's gotten way too big and in order to control this explosive growth, they've implemented this 'radically transparent' cultural approach without properly thinking through what this entails or whether it stifles diversity, creativity, camaraderie and cooperation.  

As you can see, I hold nothing back when it comes to my thoughts and truth be told, I actually like Bridgewater a lot but I have zero tolerance for nonsense, especially when it comes from an elite hedge fund managing hundreds of billions of pension and sovereign wealth fund assets.

I agree with Jagdeep Singh Bachher, the former CIO of AIMCo who is now the CIO of the University of California regents, the management transition at Bridgewater just doesn't feel right.

Let me also publicly state this: I think Greg Jensen should leave Bridgewater to start his own global macro hedge fund and his seed investor should be none other than Ray Dalio.

This might sound odd but it will reassure investors and it will show the world that Ray Dalio isn't a power-hungry tyrant who needs to control all his employees through "radical transparency" or any other coercive means (if he had a fallout with Greg Jensen, he should send him off with the money he's owed and seed his new macro fund just like Soros did with his protege who enjoyed the biggest launch ever).

Like I said, I don't mince my words, and if you think I'm too critical of the world's biggest hedge fund, you should read the rest of this comment because unlike Bridgewater, the majority of hedge funds absolutely stink and should be shut down immediately.

Cohen's Point72 Asset Management is taking extra precautions to guard against wrongdoing after Cohen's predecessor hedge fund, SAC Capital Advisors, was shut down for insider trading.

Vincent "Vinny" Tortorella, a cheery Italian-American and former federal prosecutor, is the man charged with the task, having taken over as head of Point72's compliance and surveillance unit in 2014.

Cohen has given Tortorella a blank check to do whatever it takes to keep the firm straight, including an investigative team of more than 50 staffers, including ex-federal agents who track any potential rumors of wrongdoing – both at Point72 and at competitors.

It's a proactive, rather than reactive, strategy, Tortorella told Business Insider in an interview over lunch in Manhattan. Tortorella was accompanied by two of Cohen's in-house public relations pros, also another key to his firm's makeover.

Before the insider trading investigation at Visium Asset Management became public earlier this year, for instance, Point72 put a ban on hiring those who'd recently worked there on the investment side.

Visium isn't the only firm Point72 has banned, either. Tortorella declined to say who else made the list and when exactly the Visium ban came into effect.

Point72's Visium ban contrasts with its hedge fund rivals. Ken Griffin's Citadel, for instance, recently swooped up about 17 traders from one of Visium's funds. Lombard Odier and Caxton Associates also hired Visium traders. The portfolio managers appear to have worked at Visium's global fund, a multisector equity fund that wasn't named in regulators' charges.

Reps for Citadel declined to comment, and Lombard Odier and Caxton didn't respond.

Point72 has good reason to keep strict protocol. The Securities and Exchange Commission in 2013 shut down its $16 billion predecessor, SAC Capital, banning the hedge fund from managing outside money. Cohen pleaded guilty to securities fraud and launched Point72 a year later as a family office to run his billions of wealth. A Cohen-led organization can accept outside investors' money again in 2018.

Since then, Cohen's firm has been beefing up its compliance.

"This can't ever happen again," Cohen told Tortorella when he hired him in 2014, Tortorella said.

The effort hasn't come cheap.

Cohen gave Tortorella veto powers on any potential hire, and Tortorella has used it on potential staffers who would likely have made major money for Point72. The cost of running Tortorella's team, which has grown by about 50% in the last two years, also comes to tens of millions of dollars a year, Tortorella said.

Point72's in-house surveillance team has, on occasion, fired employees who fell out of line, too. For instance, Point72 has restrictions on trading in personal accounts, and requires disclosure. Point72 fired an employee who hid a secret account.

Many in the industry scorn personal trading for the conflicts of interest that arise when traders make investments for themselves rather than for the firm.

Coincidentally, this was also an issue at Visium, where the founder, Jake Gottlieb, made a lucrative bet for himself on a trade the flagship fund also made, Business Insider reported last month. It's unclear if regulators are looking into that trade.

Other measures narrow the flow of info that Tortorella and his team have to sort through in tracking its traders. Tortorella banned instant messaging for analysts and portfolio managers, for instance. Data spying software also helps his team pick through huge flows of information.

Tortorella's team also watches how traders source their investments, such that a trader needs to back up how he or she got every piece of info leading up to a decision, Tortorella said.

Point72 isn't the first hedge fund that Tortorella has been tasked with monitoring.

He spent three and a half years at New York hedge fund Coatue Management as head of proprietary research and general counsel. Before that, he was the chief operating officer and general counsel at Guidepoint, an expert network, and a federal prosecutor in the Department of Justice's criminal division from 2004 to 2008.

The experience has given him a theory about who tends to commit insider trading.

It's not the best investors who are cheating, he said. It's those who are trying to keep their heads above water.

The investment of as much as $250 million will go to a hedge fund launched by Boston investment firm Quantopian. That fund provides money to do-it-yourself traders who come up with the best computerized investing methods, giving a share of any profits to the creators.

Mr. Cohen, chief executive officer of Point72 Asset Management LP, is also making an undisclosed investment in Quantopian itself through his family-office venture arm Point72 Ventures.

The billionaire’s new commitments are part of a broader push in the money- management world to embrace quantitative investing, which relies mainly on math-based models to bet on statistical relationships or patterns in stocks, bonds options, futures or currencies.

Although we continue to be reluctant to engage with the media, we again find ourselves in the position of being left with no choice but to respond to sensationalistic and inaccurate stories, both to make clear what is true and to do our part in fighting against the growing trend of media distortion. To let such significant mischaracterizations of our business stand would be unfair to our hard-working employees and valued clients who understand the reality of our culture and values.

While we all would hope that we could count on the Times for accurate and well-documented reporting, sadly, its article "Sex, Fear, and Video Surveillance at the World's Largest Hedge Fund" doesn’t meet that standard. In this memo we will give you clear examples of the article’s distortions. We cannot comment on the specific case raised in the article due to restrictions we face as a result of ongoing legal processes and our desire to maintain the privacies of the people involved for fear that they too will be tried in the media through sensationalistic innuendos. Nonetheless, we can say that we are confident that our management handled the case consistently with the law and we look forward to its successful resolution through the legal process.

To understand the background of this story, you should know that the New York Times reporters never made a serious attempt to understand how we operate. Instead they intentionally strung together a series of misleading "facts" in ways they felt would create the most sensationalistic story. If you want to see an accurate portrayal of Bridgewater, we suggest that you read examinations of Bridgewater written by two independent organizational psychologists and a nationally-renowned management researcher. (See An Everyone Culture by Robert Kegan; Learn or Die by Edward Hess; and Originals by Adam Grant.)

Rather than being the “‘cauldron of fear and intimidation’” the New York Times portrayed us as, Bridgewater is exactly the opposite. Bridgewater is well known for giving employees the right to speak up, especially about problems, and to make sense of things for themselves. Everyone is encouraged to bring problems to the surface in whatever ways they deem to be most appropriate. To be more specific, our employees typically report their business problems and ideas in real time through a public “issue log” and a company-wide survey that is administered quarterly. More sensitive matters are reported through an anonymous “complaint line,” and all employees have access to an Employee Relations team charged with being a closed, confidential outlet outside of the management chain for handling issues of a personal nature.

The New York Times portrayed our taping of meetings as creating “an atmosphere of constant surveillance . . . that silence[s] employees who do not fit the mold.” It is well known that Bridgewater’s taping of meetings is instead done to enable employees to hear virtually all discussions happening at the firm for themselves. We make these tapes available to employees because we believe strongly that in order to have a real idea meritocracy, people need to see and hear things for themselves rather than through the spin of others. We also believe that bad things happen behind closed doors so that such transparency is healthy.

While we acknowledge that this culture of openness is not for everyone, our employees overwhelmingly treasure this way of operating. In our most recent anonymous survey, employees rated their agreement with the statement “I believe that Bridgewater’s culture and principles are key to its success” a 4.4 out of 5. Many of our employees say they wouldn't want to work anywhere else because they so appreciate our unique idea meritocracy in which meaningful work and meaningful relationships are pursued through radical truth and transparency. The New York Times article doesn’t square with common sense. If Bridgewater was really as bad as the New York Times describes, then why would anyone want to work here?

The New York Times said that some employees “are required to lock up their personal cellphones each morning when they arrive at work” which made it sound like employees can't carry their phones around with them like employees at other companies do. This is wrong. The truth is that the vast majority of our employees freely carry around their cell phones; the only place they can't is on our trading floor, where cell phones are prohibited. This policy is to protect the confidentiality of trades in order to protect our clients’ money.

The New York Times said that the company’s culture makes it impossible for employees to have matters handled confidentially. That is also wrong. As stated above, we have clearly defined channels for reporting private matters that have been utilized by many employees over the years. These matters have always been kept confidential.

The New York Times said “over the last two years, the firm has lost billions of dollars for investors as a result of mixed performance.” That is wrong as well. In 2015, our Pure Alpha fund had its 15th consecutive year of positive returns. This year, year-to-date, we have made $1.3 billion for our clients across our strategies. While that is less than expected, it is within our stated range of expectations. Notably, our clients who know us well have demonstrated their confidence in us by investing $12 billion in new assets over the last seven months.

Concerning legal matters, because Bridgewater is culturally committed to the pursuit of truth, we have always had a strong preference to not “settle” claims but rather to be judged by the appropriate legal or regulatory system, even though that is not the expedient thing to do. Like many organizations, we encounter frivolous claims made in an effort to extract financial gain. Most companies prefer to settle them because it saves time and legal costs—and avoids the sort of distorted publicity that we are now encountering. We choose to contest them instead. At the same time, we have clear policies and standards of behavior, and when we discover behavior inconsistent with them, we act decisively. We are proud to say that in our 40 year history we have had no material adverse judgments.

We are far from perfect and we like to raise our imperfections to the surface so that we can deal with them honestly and transparently, while also protecting personal privacy. This approach is controversial and gives the media a lot of material to pick from to mischaracterize, but we believe that in the long run it is the best way for improving. It has been the biggest reason for our success. We look forward to continue being judged by our employees, our clients, and the legal and regulatory parties who are responsible for overseeing our behaviors, rather than by the media.

Turning 65 in the U.K. used to mean mandatory retirement and a future of endless holiday. But in 2016 it has come to signify a very different cut-off: membership in the single most pro-Brexit age group in the June 23 European Union referendum.

About 60 percent of Britons 65 and older voted to leave the world’s largest trading bloc in the recent vote, the most of any age group, according to two separate exitpolls. The glaring irony is that senior citizens are also the most reliant on pensions, which face a worsening funding gap since the Brexit vote.

The combined deficits of all U.K. defined-benefit pension schemes, normally employer-sponsored and promising a specified monthly payment or benefit upon retirement, rose from 820 billion pounds ($1.1 trillion) to 900 billion pounds overnight following the referendum, according to pensions consultancy Hymans Robertson. Since then, it has grown further to a record 935 billion pounds as of July 1.

A sharp drop in U.K. government bond yields to record lows, and a similar decline in corporate bond yields, is largely to blame for the uptick in defined-benefit pension liabilities. That’s because fixed income represented 47.5 percent of total 2014 assets for corporate pensions funds, of which about three-quarters were issued by the U.K. government and/or sterling-denominated, according to the 2015 Investment Association Annual Survey.

And the slump may not be over yet. While the Bank of England held off on cutting rates or increasing asset purchases at its July 14 meeting, early signals point to serious pain ahead for the U.K. economy. If additional quantitative easing is ultimately required to offset growing uncertainty, this would suggest “that bond yields are going to fall, which makes pensions a lot more expensive to provide,” former pensions minister Ros Altmann told Bloomberg. “Deficits would be larger if gilt yields fall further.”

Beyond gilt yields, Altmann said that anything that damages the economy is also bad news for pensions. The country’s gross domestic product is now expected to grow by 1.5 percent this year and just 0.6 percent in 2017, according to a Bloomberg survey of economists conducted July 15-20. That’s down from 1.8 percent and 2.1 percent, respectively, before the Brexit vote.

A weaker economy means companies will be less able to afford extra contributions precisely when pension schemes face a growing funding gap, possibly threatening future payouts to pensioners and creating a vicious feedback cycle. “If companies have got to put even more into their pension schemes than they have previously while their business is weakening, then clearly their business will be further weakened,” Altmann said.

Bad news, in other words, for Brexit’s biggest supporters.

The UK pension deficit hit a record level of £935 billion following UK’s vote to leave the EU, likely hitting pro-Brexit voters the hardest.

Support for the UK to leave the EU bloc grew with each age category, peaking at 60 per cent among those aged 65 and over, according to a survey of 12,356 referendum voters by Lord Ashcroft.

Ironically, the same voters are reliant on defined benefit pension to deliver their retirement income.

But UK’s pension deficit rose from £830 billion to £900 billion overnight following the EU referendum.

The vote then pushed the gap further to £935 billion as of July 1, according to Hymans Robertson, an independent pension’s consultancy, making it responsible for £115 billion of debt.

Gilt yields, the assets used to help value the cost of future payments, tumbled in the aftermath of the June 23 referendum, as investors bolted in favour of assets with a reputation for safety, putting more pressure on the pension industry.

Record lows in gilt yields in turn pushed the liabilities of UK pension schemes up to an all-time high £2.3 trillion on July 1.

“The gyrations in UK pension deficits are eye-watering. But one of the biggest factors that will determine whether or not pensions are paid to scheme members in full will be the health of the sponsoring company post Brexit,” Patrick Bloomfield, partner at Hymans Robertson, said.

Ros Altman, the former pensions minister, warned pensions could be under threat from the economic turmoil following UK’s vote to leave the EU.

“Good pensions depend on a good economy. Markets don’t like uncertainty, and we are clearly in unchartered territory,” Altmann said at an event in London.

“I hope we will get the political turmoil settled soon and do what we really need to be doing -which is making good policy for everyone in the country - who hopefully one day will be a pensioner if they aren’t one already,” she added.

As British businesses struggle to plan for an uncertain future in the aftermath of Britain’s decision to leave the EU, a worsening funding gap can reduce their scope to borrow money, curb their ability to invest and act as barrier to mergers and acquisitions.

High profile companies Tata Steel and BHS already showed evidence of the impact of pension deficits on investments and deal making this year.

The British Steel pension scheme, backed by Tata, has an estimated deficit of £700 million which has complicated the quest to find a new owner for Tata’s factories.

BHS’s pensions scheme had a £571 million hole when it collapsed. The risk of taking on the pensions burden is thought to be one of the reasons behind BHS’s failure to find backers or buyers for the business as a whole.

The full impact of Britain’s vote to leave the European Union has still to be felt, but uncertainty continues to affect pension investments as challenging times may lie ahead.

Pensions may not have been at the front of many people’s minds when entering the polling booths on June 23, but the Brexit referendum result is likely to have a lasting impact on pension schemes for years to come.

The immediate aftermath saw sterling plunge and markets fall, taking a toll on investors’ savings. But the longer-term effect may be just as significant.

While the impact of the EU referendum on markets may have trustees and pension scheme members seeking out the latest performance of their investments, there have been implications for the pension industry as a whole.

Ongoing annuity rates

For some scheme members close to retirement, the referendum result has had a major impact on their choices as annuity rates fell sharply post-Brexit.

“The cost of buying an annuity has got more expensive for DC [defined contribution] members close to retirement,” says Joanna Sharples, investment principal at consultancy Aon Hewitt. “Post-Brexit it will be really interesting to see how this translates across different annuity providers; however, quotes from one provider suggest that annuities are about 4 per cent more expensive, which is quite meaningful.”

Yet, the introduction of pension freedoms in April 2015 may have offered members a wider range of choices to mitigate the referendum result. Data from insurer and long-term investments industry body ABI suggests that annuity-buying activity has fallen away since the introduction of pension freedoms, with income drawdown products enjoying a corresponding rise in take-up.

Pension freedoms are likely to have a bearing on the type of investment decisions that are made in the post-referendum period, opening up opportunities to members they may not have enjoyed in previous years.

“Pensions freedoms have put existing default life cycles into question and there has been a sizeable shift from annuities to drawdown,” says Maya Bhandari, fund manager and director of the multi-asset allocation team at global asset manager Threadneedle Investments.

“We are now able to start on a blank sheet of paper and ask two crucial questions: what do people want and what do they need? Ultimately what people need is relatively simple tools and solutions that help them identify, manage or mitigate the three risks they face in retirement – financial market volatility, real returns and longevity.”

Brexit-proofing pensions

In light of the uncertainty brought about by Brexit, more scheme members might choose to take greater control over their pension savings. So-called Brexit-proofing pensions may appeal to many investors, although they will face a number of challenges.

“Pensions freedoms are still relatively new, which means people are currently faced with very mixed messages about how best to act in times of market uncertainty,” says Catherine McKenna, global head of pensions at law firm Squire Patton Boggs.

“We already know that one of the biggest trends of 2015 was the rise of the pensions scam and individuals should be careful to guard against Brexit uncertainty being used as a trigger to cash out their fund if this isn’t right for them.”

While the referendum decision and subsequent government shake-up may have ramifications for pension freedoms, any changes to existing pension legislation are unlikely to emerge in the immediate aftermath of the leave vote.

“In terms of legislation on pension freedoms, it is unlikely that the government will look to repeal what is already in place but, irrespective of Brexit, there may be further regulation to impose better value by reducing charges and product design for freedoms to develop,” says Ms McKenna.

Taking greater control of investment decisions in the current environment may pose a number of challenges, however, particularly with the increased level of volatility in markets seen in the wake of the result.

“From an investment perspective, Brexit has created much greater uncertainty and volatility in the markets, and made them more than usually reactive to political events,” says James Redgrave, European retirement director at asset management research and consultancy provider Strategic Insight.

“The FTSE 100 fell 500 points on June 24 – below 6,000 – and savers entitled to access their pots were advised to wait to take cash, if they could afford to do so.

“These markets have settled largely on the quick and orderly transition to a new government, after David Cameron’s resignation, and will have been buoyed by the Bank of England’s conclusion that an interest rate cut is not economically necessary.”

James Horniman, portfolio manager at investment manager James Hambro & Partners, says: “Investors have to position portfolios sensibly with insurance against all outcomes. Sterling is likely to come under continued pressure and there will almost certainly be volatility.

“As long as valuations are not unreasonable, it makes sense to weight any UK equity holdings towards businesses with strong US-dollar earnings rather than those reliant on raw materials from overseas – companies forced by adverse currency movements to pay extra for essential inputs from elsewhere in the world could see their profits really squeezed.”

The impact of home bias is likely to take a toll on some pension investments as fund managers have warned of being too exposed to the UK market. Under normal circumstances higher UK equities exposure may be expected, but the uncertainty introduced by the referendum result in local markets may harm returns.

Long term plans

Experts note that many trustees have already begun diversifying portfolios to mitigate geography and asset risk. The financial crisis remains a fresh memory for many trustees who will have taken a more robust approach to diversification in recent years.

“There’s been a general trend over the past decade of moving away from fund manager mandates that are very specific and narrow to wider mandates, such as global equities or multi-asset,” says Dan Mikulskis, head of defined benefit (DB) pensions at London-based investment consultancy Redington. “Trustees making fund manager changes will be more motivated to move to less constrained mandates.”

Yet, trustees and scheme members may need to get used to new market conditions and a longer-term, low-growth environment.

“Following Brexit, the conversations we’ve been having with investors are similar to those we’ve been having since the start of the year,” says Ana Harris, head of equity portfolio strategists for Europe, the Middle East and Africa at investment manager State Street Global Advisors.

“We haven’t seen a big shift in money or allocations, but there has been some realignment. What we are advising clients is not to be reactive to short-term volatility in the market and make sure plans for long-term investment are in place.”

“In the short term, it is likely there will be quite a lot of volatility in the market and members need to be aware of that,” says Aon Hewitt’s Ms Sharples. “One option is that everybody carries on as before with no change to strategy; however, the other option is trustees think about whether there are better ways of investing and opportunities to provide more diversification or add value.

“For people who are a bit further away from retirement, the key is what kind of returns can they expect going forward? Returns are likely to be lower than before because of pressure on the economy and lower growth expectations. To help offset this, members have the option of paying more in or retiring later, or a combination of both.”

With further details yet to emerge about what access the UK will have to EU markets and restrictions on free movement, the full impact of Brexit remains to be seen.

“Unfortunately, no one has a crystal ball. Even the best investment strategies may be adversely affected by current market volatility, but this is not to say members, trustees or fund managers should begin to panic,” says Ms McKenna of Squire Patton Boggs.

“There is little doubt that Britain leaving the EU will mean there are challenges ahead for investment funds; however, there are also opportunities for trustees to harness innovation and consider new investment portfolios.”

A greater focus on risk management has emerged as trustees attempt to mitigate some of the impact of June’s EU referendum result on pension schemes.

While attention may be focused on markets, pension scheme trustees will also have to consider a number of other risk management issues brought about by Brexit.

“I don’t think pensions should be focusing too much on whether sterling is going up or down, or whether one asset manager is performing,” says Dan Mikulskis, head of defined benefit pensions at investment consultancy Redington.

“Getting a risk management framework set up is sensible. With a simple framework to go by, there will be opportunities in a volatile market environment, but it’s always best left to the asset manager.”

Mr Mikulskis says regular reviewing of investment decisions and performance is likely to depend on the size of the scheme and the governance arrangements, adding that trustees may be put under pressure to communicate more frequently and effectively with scheme members.

Despite low interest rates, trustees should take care over possible liability hedging, while also recognising the challenges presented by a low-yield environment for bonds.

“We don’t think that just because rates are low they can’t fall further,” he says. “A lot of trustees that haven’t hedged will feel like they’ve missed the boat, but there are still risks on the down side.”

Bonuses at the university sector’s main pension fund have soared, even though its deficit has grown by £1.8 billion.

The annual report of the Universities Superannuation Scheme says that the shortfall between its assets and the value of pensions due to members was estimated to be £10 billion at the end of March, compared with £8.2 billion last year and predating any negative effect of the Brexit vote on pensions schemes.

The health of the fund is due to be reassessed in 2017 and Bill Galvin, its chief executive, said that it was “too early” to say whether contributions from employers and employees would need to be increased.

Despite the expanding deficit, the annual report reveals that the value of bonuses paid to staff rocketed from £10.1 million to £18.2 million last year, with the vast bulk going to the scheme’s investment team.

This contributed to the number of USS employees earning more than £200,000 once salary and bonuses are combined increasing from 29 to 51 year-on-year.

Thirteen staff earned more than £500,000, up from three the year before. While the highest-paid employee in 2014-15 received between £900,000 and £950,000, last year one worker earned about £1.6 million, with another on about £1.4 million.

Mr Galvin told Times Higher Education that the increases reflected a decision to take investment activities in-house that were previously outsourced, and strong investment performance that meant that the deficit was £2.2 billion smaller than it would otherwise have been.

“Although bonuses to the investment teams have gone up, it reflects the fact they have contributed very substantially to keep the deficit from being in a worse position than it is,” Mr Galvin said. “We are delivering a very good value pension scheme, better than any other comparable schemes we have benchmarked.”

The report shows that Mr Galvin’s total remuneration, including pension contributions, increased by 12 per cent in 2015-16, from £432,000 to £484,000.

This comes after a summer of strike action by academics – many of whom will be USS members, particularly at pre-92 universities – over an offer of a 1.1 per cent pay rise for 2016-17.

The increased deficit means that the scheme’s pensions are now estimated to be only 83 per cent funded, compared with the 90 per cent figure predicted by the last revaluation in 2014.

Mr Galvin said that the assumptions made two years ago had been “reasonable”, but that asset values had not kept pace with declining interest rates.

The last revaluation led to the closure of the USS’ final salary pension scheme and an increase in contributions by employers and employees, but Mr Galvin said that a long-term assessment would be taken to determine if further changes were needed.

“Some of the things that will be relevant in the 2017 valuation have gone against [us] in terms of the assumptions we made at the last valuation,” Mr Galvin said. “That is a signal and we will consider what we should do about that…[but] it’s too early to say whether we do need to make any response or what that response might be.”

Mr Galvin added that, while an increase in liabilities since Brexit had been “broadly balanced” with an increase in the value of assets, it was “much too early” to determine the longer term impact of the UK leaving the European Union on the fund.

Old age may not be something European scientists think about as they hop around the continent in search of exciting Ph.D. opportunities, broader postdoctoral experience, or attractive faculty positions. But once they approach retirement age, many realize that working in countries as diverse as Estonia, Spain, or Germany can be detrimental to one’s nest egg.

But now, there is a potential solution: a pan-European pension fund for researchers, called RESAVER, that was set up by a consortium of employers to stimulate researcher mobility. The fund was officially created on 14 July under Belgian law as a Brussels-based organization. Three founding members—the Central European University in Budapest; Elettra Sincrotrone Trieste in Basovizza, Italy; and the Central European Research Infrastructure Consortium headquartered in Trieste, Italy—will soon start making their first contributions. Researchers can also contribute part of their own salary to the fund.

“We have a solution” to preserve the pension benefits of mobile researchers, Paul Jankowitsch, who is the former chair of the RESAVER consortium and now oversees membership and promotion, said earlier this week here at the EuroScience Open Forum (ESOF). “The excuse [for institutions] to do nothing is gone.”

The European Commission has contributed €4 million to the set-up costs of RESAVER, as part of its funding program Horizon 2020. At least in principle, the fund is open to the entire European Economic Area, which includes all 28 E.U. member states except Croatia, as well as Norway, Lichtenstein, and Iceland.

Most European countries offer social security, and it's usually possible to get access to benefits even if they're accumulated in another country. But many universities and institutions also provide supplemental pension benefits that are not so easily transferred. Researchers who spend part of their career abroad—even if it's just a few hundred kilometers from home—can find themselves paying into a variety of supplemental plans, often resulting in lower benefits than they would enjoy if they just stayed put. This puts a damper on scientists' mobility.

The idea behind RESAVER is to create a common pension fund so that supplemental benefits will simply follow scientists whenever they change jobs or countries. Individual researchers can only join through their employers, which is why it’s essential for the scheme’s success that a large number of institutions around Europe join the initiative.

The big question is whether that will happen. In addition to the three early adopters, the RESAVER consortium, which was created in 2014, has some 20 members so far, together representing more than 200 institutions across Europe. That's just a tiny fraction of Europe's research landscape—and even most members of the consortium have not yet committed to joining the fund.

Take-up has been slow for a variety of reasons. According to Jankowitsch, the fund represents a long-term financial risk that many universities and research institutions are not accustomed to. Local factors further complicate matters. In France, many researchers have their pension fully covered by the state as civil servants. Although many institutions in Spain are part of the consortium, there are obstacles in Spanish law to joining a foreign pension fund. And in Germany, researchers at the Max Planck Institutes have little incentive to join because they already enjoy attractive pension packages.

Risk was also a concern for researchers in the audience at this week's ESOF session. The RESAVER pension plan will be contribution- rather than benefit-based, meaning that researchers will know how much they put in but not how much they’ll get, as they would with many other pension plans in Europe. Although the fund has been conceived as a pan-European risk-pooling investment, Jankowitsch acknowledges that there will always be risks in the capital market.

Some attendees also wondered whether, with so few institutions participating, RESAVER could actually be a barrier to mobility, at least in the short term, by limiting researchers to those institutions. Young researchers worried about inequalities because Ph.D. candidates are employed in some places but are considered students in others, making them ineligible for participation. (The consortium is currently negotiating a private pension plan for researchers who don't have an employment contract.)

The International Consortium of Research Staff Associations (ICoRSA) would like to see more transparency in the fund’s investment plan and more flexibility and guarantees for researchers, the organization says in a position statement sent to ScienceInsider today. But overall, “ICoRSA welcomes the initiative.”

Jankowitsch is optimistic: “We see a lot of questions, but not obstacles,” he said at ESOF. Institutes can benefit, because offering RESAVER to employees could give them a competitive hiring advantage, Jankowitsch said—but he encouraged researchers to urge their employers to join, if necessary. “If organizations are not joining, then this is not happening.”

Japan’s $1.3 trillion public pension fund—the world’s largest of its kind—posted its worst performance since the 2008 global financial crisis in the fiscal year ended March on a fall in share prices world-wide and a strengthening yen.

The Government Pension Investment Fund recorded paper losses of ¥5.3 trillion ($51 billion), or a return of -3.81% on its investments, putting its total assets at ¥134.7 trillion at the end of March, the fund said Friday.

The GPIF’s results are seen as a gauge of broad market performance, as the fund owns nearly 1% of global equity markets and more than 7% of the Japanese stock market. Domestic and foreign equities comprised 44% of the portfolio at the end of March, below its 50% target weighting for the asset class, the fund said in a statement.

The GPIF isn’t the only major pension fund to struggle recently. The U.S.’s largest public pension fund, the California Public Employees’ Retirement System, or Calpers, said this month that it earned 0.6% on its investments for the fiscal year ended June 30, the second straight year the fund missed its 7.5% internal investment target. Norway’s Government Pension Fund Global had its worst performance since 2011.

Japan’s labor ministry has asked the GPIF to achieve a real investment return—accounting for a rise in wage increases—of 1.7% yearly. Though the fund’s performance for fiscal 2015 was well below that target, the fund’s average real annual performance of 2.60% over the past 15 years exceeded it.

However, because the GPIF manages reserves for Japan’s national pension plan, poor investment performance in the short term is judged harshly by the public and opposition political parties, many of whom are suspicious of financial markets. Even the timing of the announcement of the fund’s latest results had drawn criticism. Opposition politicians have pointed out that it was scheduled to come after national election earlier in the month. A loss reported before the vote could have hurt the ruling party’s showing, they said. The fund has said there was nothing political about the release date.

Domestic bonds were a bright spot in GPIF’s portfolio, even though the Bank of Japan has pursued a massive easing program in part to push Japanese investors away from domestic bonds and into higher-yielding assets. At the end of March, the fund had 37.55% of its portfolio in domestic debt—higher than the fund’s 35% asset-class allocation.

Domestic bonds returned 4.07% in the year ended in March as the BOJ’s asset purchases and the introduction of a negative interest-rate policy lifted bond prices.

Friday was a big day for the world’s largest pension fund, which posted its worst annual loss since the financial crisis and disclosed individual equity holdings for the first time. The two may be connected.

The list of domestic shares owned by Japan’s $1.3 trillion Government Pension Investment Fund hews closely to the benchmark Topix index, which isn’t that surprising for a fund where almost 80 percent of investments are passive. But it means that in market downturns like in the past year, GPIF will struggle to increase assets.

The fund recorded a 5.3 trillion yen ($52 billion) loss for the 12 months ended March, the largest decline in seven years. Japan stock holdings tumbled 10.8 percent. For Sumitomo Mitsui Asset Management Co., GPIF should branch out from hugging indexes.

“There’s more they can do,” said Masahiro Ichikawa, a senior strategist at the Tokyo-based money manager. “They should be more active with their currency hedging and their investments. They should also look to increase exposure to alternatives.”

While criticism of GPIF’s passive approach to investing isn’t new, this is the first year the fund posted a loss since it doubled its allocation to stocks in 2014 and reduced its investments in domestic bonds, which were the only asset to return a profit in the year. The fund is taking flak on both sides, from those who want to turn back the clock to when it held more bonds to people who say it should become more of a stock picker.

The Topix index fell 0.1 percent at the close in Tokyo on Monday, as the yen traded at 102.43 per dollar following a 3.1 percent jump on Friday.

For a QuickTake on Japan’s pension fund, click here.

GPIF’s investment loss of 3.8 percent was the worst since a 7.6 percent slide in the 12 months ended March 2009. The fund lost 9.6 percent on foreign shares and 3.3 percent on overseas debt, while gaining 4.1 percent on Japanese bonds. GPIF said Toyota Motor Corp. and Mitsubishi UFJ Financial Group Inc., which have the largest weightings in the Topix, were the biggest Japan stock investments as of March 31, 2015.

GPIF’s Canadian pension peer, hailed as an example of how the Japanese fund should be run, posted a 3.4 percent return on investments for the fiscal year ended March, despite the global equity rout. The $212 billion Canada Pension Plan Investment Board had its biggest gains from private emerging market equities, real estate and infrastructure. South Korea’s national pension fund had a return rate of 2.4 percent this year as of April.

Home Bias

The Canadian retirement manager wrote in its 2016 annual report about how it had moved away from passively managing its portfolio to take advantage of its size, certainty of pension contributions and long-term investment horizon. The fund has just 19 percent of its holdings invested in Canada, whereas GPIF has 59 percent in Japanese securities.

“GPIF should invest more actively but from a long-term perspective,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo. “That’s the only way they can improve their returns.”

GPIF President Norihiro Takahashi, speaking after the results announcement on Friday, said the fund planned to use its allowable deviation limits when allocating assets, in a sign he will be flexible in managing the portfolio.

In 2013, a panel handpicked by Prime Minister Shinzo Abe recommended ways to overhaul GPIF. While suggesting the fund move away from its concentrated investments in Japanese bonds, which it did the next year, the group led by Columbia University professor Takatoshi Ito said GPIF should consider increasing active management, moving some investments in-house, and tracking indexes other than the Topix as it includes stocks “lacking sufficient investment profitability.”

In-House Investments

GPIF took some suggestions on board, including adopting the JPX-Nikkei Index 400 as a new benchmark equity measure. Still, the fund’s overseers stopped short of letting the fund make in-house stock investments, a course that GPIF Chief Investment Officer Hiromichi Mizuno said would have helped cut costs and increase internal expertise.

GPIF also lost on overseas assets last fiscal year as the yen advanced 6.7 percent against the dollar, reducing the value of investments when repatriated. It wasn’t until December last year that reports said GPIF would start to hedge against currency fluctuations for a small part of its investments, a strategy called for almost a year earlier by one of its investment advisers.

“The results should lead to a debate on searching for new investments, whether it’s alternative assets, domestic small and mid-cap corporate debt, REITs or real estate,” said Akio Yoshino, chief economist at Amundi Japan Ltd. in Tokyo. “But the mainstream expectation is that GPIF probably won’t change its management direction.”

1. A shift in its asset allocation away from domestic bonds to riskier domestic and foreign stocks.
2. A surging yen which negatively impacted its foreign stock and bond holdings.

Japan shares whipsawed and the yen surged after the Bank of Japan threw markets a smaller-than-expected bone in a keenly watched decision on Friday.

While the BOJ eased its monetary policy further by increasing its purchases of exchange-traded funds (ETFs), it didn't change interest rates or increase the monetary base, as analysts had widely expected.

The central bank said it would increase its ETF purchases so that their amount outstanding on its balance sheet would rise at an annual pace of 6 trillion yen ($56.7 billion), from 3.3 trillion yen previously.

"The message the BOJ is sending is not so much much 'whatever it takes' as 'monetary policy's pretty much played out'," said Kit Juckes, global fixed income strategist at Societe Generale.

The Japanese yen surged against the dollar after the announcement, with the dollar-yen pair falling as low as 102.85, compared with around 103.75 immediately before the decision. The pair was already volatile before the announcement, touching a session high of 105.33.

At 2:31 p.m. HK/SIN, the dollar was fetching 103.52 yen.

The benchmark Nikkei 225 whipsawed after the decision, tumbling as much as 1.66 percent immediately after the announcement. It quickly retraced the fall, but then spent the remainder of the session volleying between gains and losses. At market close, the Nikkei finished up 92.43 points, or 0.56 percent, at 16,569.27.

In the bond market, Japanese government bonds (JGBs) sold off. The yield on the benchmark 10-year JGB jumped to negative 0.169, from an earlier low of negative 0.276. Yields move inversely to bond prices. Many analysts had expected the BOJ would increase its JGB purchases.

Sean Darby, chief global equity strategist at Jefferies, said in a note that the news on the ETF purchases "should boost sentiment on stocks," but "overall monetary policy will only be marginally changed given that the BOJ's balance sheet expansion has already decelerated."

"The absence of any change on deposit rates will have disappointed those investors seeking a bolder move by the BOJ," said Darby.

Other Asian markets were nearly flat or mostly lower. The ASX 200 in Australia saw a slight gain of 5.80 points, or 0.1 percent, to 5,562.35. In South Korea, the Kospi closed down 4.91 points, or 0.24 percent, at 2,016.19. Hong Kong's Hang Seng index slipped 327.06 points, or 1.47 percent, to 21,847.28.

Chinese mainland markets were lower, with the Shanghai composite closing down 14.94 points, or 0.5 percent, at 2,979.37, while the Shenzhen composite was off by 9.44 points, or 0.48 percent, at 1,941.55.

The Bank of Japan expanded stimulus Friday by doubling its purchases of exchange-traded funds, yielding to pressure from the government and financial markets for action but disappointing investors who had set their hearts on more audacious measures.

The central bank, however, said it will conduct a thorough assessment of the effects of its negative interest rate policy and massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming.

BOJ Gov. Haruhiko Kuroda said the bank will conduct the review not because its policy tools have been exhausted, but to come up with better ways of achieving its 2 percent inflation target — keeping alive expectations for further monetary easing.

“I don’t think we’ve reached the limits both in terms of the possibility of more rate cuts and increased asset purchases,” Kuroda told reporters after the policy meeting.

“We will of course consider what to do in terms of monetary policy steps, based on the outcome of the assessment.”

Ahead of the meeting, speculation had mounted over the possibility it would take a so-called helicopter money approach that would entail more direct infusions of money into the economy.

Recently, the government downgraded its growth forecast for 2016 to 0.9 percent from 1.7 percent.

“With underlying inflation set to moderate further toward the end of the year, we think that the bank will still have to provide more easing before too long,” Marcel Thieliant of Capital Economics said in an analysis. “Overall, today’s decision was a clear disappointment,” he said.

The 7-2 central bank decision was to almost double its annual purchases of exchange traded funds to ¥6 trillion from the current ¥3.3 trillion. A fifth of that will be earmarked for companies that meet new benchmarks for investing in staffing and equipment, it said in a statement.

It also doubled the size of a U.S. dollar lending program to support Japanese companies’ operations overseas, to $24 billion.

The BOJ already is injecting about ¥80 trillion a year into the economy through asset purchases, mainly of Japanese government bonds.

The BOJ was under heavy pressure to act after earlier this week Prime Minister Shinzo Abe announced ¥28 trillion in spending initiatives to help support the sagging economic recovery led by his feeble Abenomics policies.

By coordinating its action with the big fiscal spending package, the BOJ likely aimed to maximize the effect of its measures on the world’s third-biggest economy, which is struggling to escape decades of deflation.

“The BOJ believes that (today’s) monetary policy measures and the government’s initiatives will produce synergy effects on the economy,” the central bank said in a statement announcing the policy decision.

The BOJ maintained its rosy inflation forecasts for fiscal 2017 and 2018 in a quarterly review of its projections. It also left intact the time frame for hitting its price growth target, but warned uncertainties could cause delays.

The BOJ justified Friday’s monetary easing as aimed at preventing external headwinds, such as weak emerging market demand.

The recent vote by Britain to leave the European Union has added to the uncertainties clouding the global outlook at a time when Japan’s recovery remains in question.

“There is considerable uncertainty over the outlook for prices against the background of uncertainties surrounding overseas economies and global financial markets,” the central bank said.

The central bank did not change the interest it charges on policy-rate balances it holds for commercial banks, which is now at a record low minus 0.1 percent.

Financial markets seemed underwhelmed by the central bank’s modest action.

The Nikkei 225 stock index had dropped nearly 2 percent on Friday but later regained some ground to end 0.56 percent higher.

Ahead of the BOJ decision, Japan reported further signs of weakness in its economy in June, with industrial output and consumer spending falling from the year before.

Core inflation, excluding volatile food prices, dropped 0.5 percent from 0.4 percent in May, while household spending fell 2.2 percent from a year earlier.

Unemployment had fallen to 3.1 percent in June from 3.2 percent for the past several months, but tightness in the job market has not spilled into significant increases in wages that might help spur more consumer demand and encourage businesses to invest in the sort of “virtuous cycle” Abe has been promising since he took office in late 2012 under Abenomics.

Still, while industrial output fell 1.9 percent from the year before, it rose 1.9 percent from the month before, with strong shipments related to home building and other construction.

The dollar is set to fall 5 percent in the next few months, the Federal Reserve isn’t raising interest rates anytime soon and U.S. economic data is only going to get worse.

That’s what Morgan Stanley chief global currency strategist Hans Redeker told clients in a note published Thursday, citing in-house indicators showing U.S. domestic demand is set to fade in the coming months. It didn’t take long for markets to prove him prescient. The greenback fell 1.3 percent Friday, capping its worst week since April, after the Commerce Department said U.S. second-quarter gross domestic product advanced at about half the rate economists had forecast.

“We are quite pessimistic about, first, the outcome of the U.S. economy,” Redeker said in an interview on Bloomberg Television Friday, before the GDP report’s release. “When you look at our internal indicators, which capture domestic demand very well, they are suggesting that the demand strength is going to fade from here.”

The greenback had rallied in recent weeks on mounting speculation the Fed will hike rates in the coming months following better-than-expected data on jobs, retail sales and industrial production. Dollar bulls’ hopes were dampened Wednesday after a lukewarm policy statement from Fed officials that signaled only a gradual pace towards tighter monetary policy. They were dashed after Friday’s GDP print, which showed a 1.2 percent annualized increase in the April-June period, less than the 2.5 percent median forecast of economists surveyed by Bloomberg.

Derivatives traders are now betting there’s only about a 1-in-3 chance of a rate hike this year, down from more than 50 percent at the beginning of the week. July data on payrolls and manufacturing, set for release next week, will give investors a clearer read on the path of Fed policy through the end of the year.

Further dollar strength will be limited as policy divergence between the U.S., Japan and Europe slows, according to Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc.

“The dollar still benefits when U.S. growth looks OK, but call it a limping divergence trade, not the kind of divergence trade we were talking about last year or the year before,” Englander said Friday on Bloomberg Television.

In my last comment looking at whether US stocks will melt up, I stated that I foresee the US dollar gaining strength in the second half of the year and this will weigh on oil prices (USO), energy (XLE), metals and mining (XME), and gold shares, especially gold miners (GDX) which rallied hard this year.  It will also weigh on industrials (XLI) and emerging markets (EEM).

However, I also stated there are clear signs that the US economy is slowing and it's likely the Fed is out of the way for the remainder of the year. If the US economy is slowing and the Fed doesn't raise rates this year, how can the US dollar index (DXY) gain in the second half of the year?

Good question. Let's assume the US dollar continues to weaken, especially relative to the yen but also relative to the euro. How long can this go on before we see another Asian financial crisis? Remember, US dollar weakness comes at the expense of a stronger yen and euro, impacting their exports at a time when they're still grappling with deflation.

So far, the yen has born the brunt of US dollar weakness but the yen's surge could trigger a crisis which reverberates around the world.

That's why when I read nonsense on the endgame for the dollar bull run approaching, I ask myself what exactly that means when Japan is grappling with deflation? US dollar weakness means yen strength, which can't go on forever without Japanese authorities intervening in a massive way.

Also, if the Fed stays put and the US dollar keeps weakening, other central banks are going to continue doing whatever they can to ease the pressure of a strengthening currency.

1. The US economy slows and the Fed stays put. Currency strategists will tell you if the Fed doesn't raise rates, that is bearish for the USD. I say "bullocks" because if the US economy is slowing, the rest of the world fighting deflation is in even bigger trouble. If the Fed stands pat, you will see the Bank of Japan and the ECB pick up their QE/ negative rate activities to fight their deflationary scourge.
2. The US economy grows and the Fed raises rates. JPMorgan's CEO Jamie Dimon was on CNBC yesterday stating US GDP could rise to 4% under next president and even questioned the accuracy of GDP data stating: “Look, I’m not a buyer of 10-year bonds. I would be a little worried about drastic actions in 10-year bonds.” I have openly disagreed with him on his call for a rout in Treasuries (and have been right mostly because of activities outside the US) but several economists including Leo de Bever would agree with him that GDP isn't a good measure of economic activity because it leaves too much "human capital" out. For argument's sake, let's say the US economy surprises everyone to the upside, then what happens to the US dollar? It will rally hard as the Fed starts raising rates faster than all other central banks.

Look if the US economy is slowing the rest of the world will slow or is already slowing too. Last I checked US rates are still positive and the US economy is doing better than the other major economies, so weakness for the US dollar is a capitulation of the long US positions that were built up and should be used as a buying opportunity. Did Morgan Stanley get the move from Oct 2015 to Jan right? There is just too much uncertainty right now (Brexit, US elections, etc.) therefore positions will be paired down which is why the USD is not going up at the moment. In the short-run the USD will likely trade sideways but any shock should bring back USD buying and August tends to be a month of such events.

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks.

Noting the recent run-up in the benchmark Standard & Poor's 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a world of uber complacency.

The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. gross domestic product in the second quarter grew at a meager 1.2 percent rate.

"The artist Christopher Wool has a word painting, 'Sell the house, sell the car, sell the kids.' That's exactly how I feel sell everything. Nothing here looks good," Gundlach said in a telephone interview. "The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong."

Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went "maximum negative" on Treasurys on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32 percent.

"We never short in our mainline strategies. We also never go to zero Treasurys. We went to lower weightings and change the duration," Gundlach said.

Currently, the yield on the 10-year Treasury note is 1.45 percent, which has translated into some profits so far for DoubleLine.

"The yield on the 10-year yield may reverse and go lower again but I am not interested. You don't make any money. The risk-reward is horrific," Gundlach said. "There is no upside" in Treasury prices.

Gundlach reiterated that gold and gold miners are the best alternative to Treasurys and predicted gold prices will reach $1,400. U.S. gold on Friday settled up at $1,349 per ounce.

Gundlach lambasted Federal Reserve officials yet again for talking up rate hikes for this year while the latest GDP data showed disappointing economic growth. "The Fed is out to lunch. Does the Fed look at what's going on in the economy? It is unbelievable," he said.

Overall, Gundlach said the Bank of Japan's decision on Friday to stick with its minus 0.1 percent benchmark rate — and refrain from deeper cuts — reflects the limitations of monetary policy. "You can't save your economy by destroying your financial system," he said.

Given my bullish USD views, I wouldn't touch gold, especially after the big run-up this year but I agree with his stance on the greenback which is why I remain short commodity currencies and emerging market stocks (EEM), bonds and currencies.

In terms of risk assets, I continue to recommend the biotech sector (IBB and XBI) and see it continuing to gain in the months ahead heading into the US election and beyond but it will be volatile. If you want to hedge your portfolio, stick to good old US bonds (TLT), the ultimate diversifier in a deflationary world.

And make no mistake, despite talk of a redistributive war on inequality, deflation isn't dead, not by a long shot, which is the biggest reason why I remain long US dollars. In fact, if you want to understand the bigger trends in currencies, just look at which parts of the world are grappling with deflation most and short their currencies on any strength (like the yen below 100 USD).

Mayor Rahm Emanuel unveiled a plan on Wednesday that he called "an honest approach" to save the city's biggest retirement system from insolvency with a water and sewer tax to be phased in over five years starting in 2017.

The municipal retirement system, which covers about 71,000 current and former city workers, is projected to run out of money within 10 years as it sinks under an unfunded liability of $18.6 billion.

The new tax would generate $56 million in its first year and increase to $239 million annually by 2020, the mayor's office said.

"Today, one of the big question marks that hung around the city because of past decisions — or past decisions that were not made — we have addressed," Emanuel told an investor conference in Chicago.

"Every one of the city's pensions has a dedicated revenue stream ... to keep the promise not only to the employees, but to the city's future and do it in a way that does not undermine the economic well-being of the city," he said.

The plan would require approval by Chicago's city council, which Emanuel said he intends to seek in September. Chicago then needs the Illinois legislature to approve a five-year phase-in of the city's contribution to the pension system to attain a 90 percent funding level by 2057.

The tax comes on top of an increase in water and sewer rates between 2012 and 2015 to generate money to repair and replace aging infrastructure. Revenue rose from $644.1 million in 2011 to $1.125 billion in 2015.

The rescue plan for the municipal system follows previous action by the city to boost funding for police and fire pensions through a phased-in $543 million property tax increase, and its laborers' system through a hike in a telephone surcharge.

Chicago's big pension burden was a driving factor in the downgrade of the city's credit rating last year to the "junk" level of 'Ba1' by Moody's Investors Service. Standard & Poor's warned in June it may cut the city's 'BBB-plus' rating in the absence of a comprehensive pension fix.

The task of fixing the city's pensions became harder after the Illinois Supreme Court in March threw out a 2014 state law that reduced benefits and increased city and worker contributions to the municipal and laborers' funds.

Mayor Rahm Emanuel on Wednesday called for a new tax on city water and sewer bills to stabilize the city's largest pension fund, a move he portrayed as his latest tough decision to secure Chicago's financial future.

Emanuel's plan, which would increase the average water and sewer bill by 30 percent over the next four years, was quickly met with resistance from some aldermen who argued the city would be better off adding business taxes or even raising property taxes again to come up with the hundreds of millions of dollars a year needed to keep the city's municipal workers' pension fund from going bust.

Still, Emanuel projected confidence his plan ultimately would win approval in the City Council, which rarely rebuffs the mayor's proposals and has yet to independently provide its own solution to solidify any of the city's four major pension systems that have been woefully underfunded for more than a decade.

In a speech to about 200 financial investors Wednesday, Emanuel unveiled his water and sewer tax plan while making the case to Wall Street that his administration has done the hard work to brighten Chicago's dark financial picture.

For the first time since he took office in 2011, Emanuel said, there are concrete plans to properly fund the retirements of the city's police officers, firefighters, laborers and municipal workers. He told the Chicago Investors Conference that the city's budget deficit is at a 10-year low. And he sought to make the case it all had been done without disturbing a business climate that has appealed to major corporations and startups.

"The city of Chicago met our challenges head on, dealt with them systematically, did it in a way that's complementary to our overall economic strategy to contribute to the well-being and the overall growth strategy that is laid out for the city of Chicago," Emanuel said from the Symphony Center's ornate stage. "We addressed the past, but did it in a way that did not shortchange the future of the city of Chicago."

But even as the mayor seemingly claimed victory on fixing Chicago's financial woes, challenges remain.

Debt rating agencies have repeatedly lowered the city's credit rating in recent years, with one placing it at junk status. The picture at Chicago Public Schools is even worse, with all three major rating agencies terming the district's bonds junk while the Emanuel-appointed Board of Education plans to raise property taxes by $250 million next year to help pay for teacher pensions.

And several aldermen expressed opposition to Emanuel's new utility tax, including Ald. Roderick Sawyer, chairman of the City Council's Black Caucus. Sawyer, 6th, predicted Emanuel would have a hard time building enough council support for the water and sewer tax after asking aldermen to pass a record property tax increase to fund police and fire pensions last year.

"We understand that the can had been kicked down for many, many years, and now it's incumbent upon us to find solutions," Sawyer said. "This is a tough one, though. This is an additional tax that ramps up to many, many dollars a month."

'Pitchforks and torches'

Under Emanuel's proposal, the new utility tax would be phased in over the next four years, with the average homeowner's water and sewer bills increasing by $53 next year, or $8.86 on the bills sent out every two months. By the end of the four-year phase-in, that same homeowner would pay an additional $226 per year in water and sewer taxes, or $37.65 on each bill.

After four years, the proposal would amount to a 30 percent tax on water and sewer bills, or $2.51 for every 1,000 gallons of water used, the Emanuel administration said. The average annual water and sewer bill, based on 90,000 gallons of water, currently is about $684. The bills also would rise each year at the rate of inflation.

Once fully phased in, the new tax would produce an estimated $239 million a year to help reduce the $18.6 billion the city owes the municipal workers' fund, which represents nearly all city workers except police officers, firefighters or employees who do manual labor.

Emanuel's goal is to restore the municipal workers' account to 90 percent funding over the next 40 years. The mayor and aldermen already have raised taxes to do the same for the city's three other major pension funds for police, firefighters and laborers. Emanuel said he will seek a City Council vote on the water and sewer tax in September.

"I don't take this lightly, but we are fixing the problem that has penalized the city's potential to grow economically, and there's a finality to it," Emanuel said in an interview late Wednesday. "All four pensions have a revenue source."

The taxes will be tacked on to bills that went up when, shortly after taking office in 2011, Emanuel set in motion a series of water and sewer fee increases that more than doubled those bills to upgrade water and sewer systems.

Ald. Ameya Pawar, 47th, called the new tax "the right thing to do," noting that the alternative of not properly funding the pensions would be "catastrophic."

But with homeowners already starting to feel the hit from last year's property tax increase combined with a new round of assessments, Pawar acknowledged aldermen can expect complaints from constituents.

"People will be upset," said Pawar, an Emanuel ally. "They've seen their water rates go up."

Far Northwest Side Ald. Anthony Napolitano, 41st, said it's going to be difficult for him to face constituents reeling from the huge property tax increases in bills they just received and tell them to brace themselves for another hit.

"Pitchforks and torches, probably," he said when asked how residents would react. "It's not going to be good. Because my reaction now, in my neighborhood, after these (property) tax bills came out is, 'We're leaving. We're out.'

"I get that we're in some tough times. And people get that we have to make some concessions, that we're going to pay more in tax dollars. People get that," Napolitano said. "But when it happens year after year after year, people are saying 'Why am I staying here?'"

Northwest Side Ald. Milagros "Milly" Santiago, 31st, said the mayor should consider other revenue ideas brought forward in the past year by the council's Progressive Caucus. Those have included a tax on financial transactions, a commuter tax, a graduated income tax, a "stormwater stress" tax on businesses with large parking lots and a move to return more money to the general fund from special taxing districts throughout the city.

"We're here evaluating the whole thing and seeing if it's legitimate for us to vote next month on this idea," Santiago said as she left a briefing on the mayor's plan at City Hall. "I don't think it's a good idea. We're going to have to have a closer look at it and see if there's other ways to do it. But it's just not good news."

Sawyer also advocated for Emanuel to consider some of the Progressive Caucus' tax ideas, but many are long shots or would take time and approval elsewhere.

A financial transaction tax would require state and federal approval. A graduated income tax would require approval from a gridlocked Springfield. A commuter tax, which amounts to an income tax on suburban residents working in the city, would require state approval while critics argue it could cause a flight of businesses from the city or prevent new ones from moving in.

Only the stormwater tax on businesses and shifting more money from special taxing districts are within the City Council's power alone.

"We did get a commitment that they're going to look at all options this year. We're going to hold them to that," Sawyer said.

Aldermen did come up with additional ideas. Napolitano suggested allowing video gaming, which long has been banned in the city. Ald. Anthony Beale, 9th, called for charging tolls on expressways at the Chicago border.

Ald. Howard Brookins, 21st, urged a more traditional solution: another property tax increase. Brookins argued raising property taxes is more fair to lower-income residents and can be written off on federal tax returns. But he acknowledged another increase might not have enough support.

"This (the water and sewer tax), everyone is going to pay it equally; whether you live in a million-dollar home or a $50,000 home, we all have to use water, and it disproportionately affects the people of my community," Brookins said. "We have to think long term and get away from the stereotypes about property taxes and start explaining to people why a property tax is fairer than the other taxes and fees that they are going to ultimately end up paying."

Ald. Joe Moore, an Emanuel ally, said he'd be willing to entertain Brookins' push for another property tax increase, but said "it's kind of difficult to go to that well again" so soon. The water and sewer tax, he said, "might be the best of a bad set of options. ... We have to do something."

'Once and for all'

While Emanuel's utility tax would not require approval from state lawmakers, proposed changes he laid out Wednesday in how municipal workers contribute to their retirements would.

The mayor plans to ask the General Assembly and Republican Gov. Bruce Rauner to sign off on altering the municipal fund pension system to save about $2 billion over the next 40 years. The legislative changes to the pension fund would require newly hired employees, starting next year, to increase their retirement account contributions to 11.5 percent of their salary from 8.5 percent.

Employees who were hired from 2011 to 2016 and already receive lower retirement benefits would have the option of increasing their contributions to 11.5 percent. In exchange, they would be eligible to retire at age 65 instead of 67.

But employees hired before 2011 would see no changes, after the Illinois Supreme Court struck down Emanuel's earlier attempt to reduce their benefits, citing a constitutional clause that states their benefits shall not be diminished or impaired. "You can't touch existing employees, that's walled off," Emanuel told investors.

Emanuel and affected unions have an "agreement in principle" on identical changes to the much smaller city laborers fund, with additional city contributions coming from a $1.90-per-month-increase on landline and cellphones billed to city addresses that was approved by the City Council two years ago.

Last year, the mayor pushed through a $543 million property tax increase, phased in over four years, to come up with enough funding for police and fire pensions. No changes were made to the retirement age or contribution amounts for those two unions.

Emanuel stressed in his speech to investors that Chicago's overall fiscal health is on the rebound.

"Chicago was in a pension penalty box. It had not addressed its problems," Emanuel said. "Denial is not a long-term strategy, and for too long Chicago was operating where denial was the long-term strategy."

Richard Ciccarone, president and CEO of the municipal bond analysis firm Merritt Research Services, attended the conference and said he thought the crowd was generally impressed with the mayor's argument.

"He reinforced his strategy, which he said has been his since Day One, and that is that you can't solve the fiscal problems without having economic growth. I think he made his case," Ciccarone said. "I got the impression that they made headway with a lot of people here."

In a question-and-answer session with the investors after Emanuel's speech, the mayor was asked if he had enough votes from aldermen to pass the plan. "Yes," Emanuel replied without hesitation.

The mayor continued to project that certainty in his interview with the Tribune, while also lavishing praise on the aldermen he must win over.

"The lion's share of the aldermen did not create the problem, but the lion's share of the aldermen in there have been part of the solution. I am confident they will take the necessary steps," Emanuel said.

"They have never wavered, their knees have never buckled and they will answer the call of history to solve the problem once and for all."

When Greece was going through its crisis last year, my uncle from Crete would call me and blurt "it's worse than Chicago here!", referring to the old Al Capone days when Chicago was the Wild West. Little did he know that in many ways, Chicago is much worse than Greece because Greeks had no choice but to swallow their bitter medicine (and they're still swallowing it).

In Chicago, powerful public unions are going head to head with a powerful and unpopular mayor who got rebuffed by Illinois's Supreme Court when he tried cutting pension benefits. Now, they are tinkering around the edges, increasing the contribution rate for new employees of the city's smallest pension, which is not going to make a significant impact on what is truly ailing Chicago and Illinois's public pensions.

All these measures are like putting a band-aid over a metastasized tumor. Creditors know exactly what I'm talking about which is why I'll be shocked if they ease up on the city's credit rating.

Importantly, when a public pension is 42% or 32% funded, it's effectively broke and nothing they do can fix the problem unless they increase contributions and cut benefits for everyone, top up these pensions and introduce real governance and a risk-sharing model.

When people ask me what's the number one problem with Chicago's public pensions, I tell them straight out: "Governance, Governance and Governance". This city has a long history of corrupt public union leaders and equally corrupt politicians who kept masking the pension crisis for as long as possible. And Chicago isn't alone; there are plenty of other American cities in dire straits when it comes to public finances and public pensions.

But nobody dares discuss these problems in an open and honest way. Unions point the finger at politicians and politicians point the finger at unions and US taxpayers end up footing the public pension bill.

This is why when I read stupid articles in Canadian newspapers questioning the compensation and performance at Canada's large public pensions, I ignore them because these foolish journalists haven't done their research to understand why what we have here is infinitely better than what they have in the United States and elsewhere.

Why are we paying Canadian public pension fund managers big bucks? Because we got the governance right, paying public pension managers properly to bring assets internally, diversifying across public and private assets all around the world and only paying external funds when it can't be replicated internally. This lowers the costs and improves the performance of our public pensions which is why none of Canada's Top Ten pensions are chronically underfunded (a few are even over-funded and super-funded).

What else? Canada's best public pensions -- Ontario Teachers, HOOPP and even smaller ones like CAAT and OPTrust -- have implemented a risk-sharing model that ensures pension contributors, beneficiaries and governments share the risk of the plan so as not to impose any additional tax burden on Canadian taxpayers if these plans ever become underfunded. This level of governance and risk-sharing simply doesn't exist at any US public pension which is why many of them are chronically underfunded or on the verge of becoming chronically underfunded.

For the second straight year, U.S. public pension funds have fallen well short of their investment targets, swelling their vast unfunded liabilities and placing a greater burden on municipalities to offset the underperformance through increased contributions, estimates show.

The funds, which guarantee retirement benefits for millions of public workers, logged total returns of around 1 percent for the fiscal year ending June 30, while private pension funds earned more than triple that, according to preliminary estimates from consulting firms Wilshire Consulting and Milliman, respectively. Those figures could change as complete data for the period becomes available.

That is a poor showing relative to the 7 percent or more that pension funds seek to earn annually.

The shortfalls could add fuel to the growing debate about the long-term viability of public pensions - which financier Warren Buffett once referred to as a "gigantic financial tapeworm."

The funds have suffered from years of underfunding exacerbated by states lowering their contributions when the funds were performing well, political resistance to increasing taxpayer contributions, overly optimistic return assumptions and retirees living much longer than they used to.

The 100 largest U.S. public pension funds were just 75 percent funded, according to a 2015 study conducted by Milliman.

The pension funds have been challenged by a multi-year environment of rock-bottom interest rates and mixed stock market performance.

Public pension funds likely did worse than private funds, because the public funds had more money in short-term bonds which, during the fiscal year, underperformed the long-term bonds that private pension funds favor, said Ned McGuire, vice president and member of the Pension Risk Solutions Group at Wilshire Consulting.

Complete data on the public funds isn't available yet, but early reporters reveal significant underperformance.

The California Public Employees' Retirement System (CalPers) and The California State Teachers' Retirement System (CalStrs), the two largest public pension funds, returned 0.6 percent and 1.4 percent respectively, in the 12 months ending June 30. That is a huge miss compared with the 7.5 percent they need to reach fund their liabilities in the long run.

The New York State Common Retirement Fund, the nation's third-largest public pension fund, earned just 0.19 percent return on investments, missing its 7 percent target.

The Wisconsin Retirement System, the ninth-largest U.S. public pension fund, had a return of 4.4 percent for its core fund in fiscal 2016, well below its assumed rate of return of 7.2 percent.

In response to missing its target, also known as its "discount rate," CalPers on Monday said it was reviewing the changing demographics of its members, the economy and expectations for financial markets.

"We will conduct these reviews over the next year to determine if our discount rate should be changed sooner rather than later," CalPers said in a statement.

Public funds had a return of just over 1 percent, while corporate funds had a return of 1.64 percent, according to a report released on Tuesday by Wilshire Trust Universe Comparison Service, a database service provided by Wilshire Analytics.

At the same time, the top 100 corporate funds returned 3.3 percent, according to Milliman. Becky Sielman, an actuary at Milliman, said the most recent underperformance is harder to handle because it continues a troubling trend for public and private funds.

"It's easier to absorb one down year followed by a good year," she said. "Likely what we have here for many plans is two down years in a row."

The funded status of the 100 largest corporate defined benefit pension plans dropped by $46 billion during June as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $447 billion at the end of June, primarily due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of June 30, the funded ratio decreased to 75.7%, down from 77.5% at the end of May.

The decision of the U.K. to separate themselves from the other 27 European Union countries will cause the most damage (compared to expectations) to the balance sheet of employers with a fiscal year that ends on June 30, 2016, and collateral damage to pension cost for fiscal years starting on July 1, 2016. The impact on pension cost could vary depending on the selection of a mark-to-market methodology or smoothing of gains and losses.

The projected benefit obligation (PBO), or pension liabilities, increased to $1.839 trillion at the end of June from $1.785 trillion at the end of May. The change resulted from a decrease of 23 basis points in the monthly discount rate to 3.45% for June, from 3.68% for May. The discount rate at the end of June is the lowest it has been in 2016 and is the second lowest in the 16-year history of the Milliman 100 PFI. Only the January 2015 discount rate of 3.41% was lower. We note that the funded status deficit in January 2015 was $427 billion. The highest funded status deficit in dollars was $480 billion in October 2012.

There's an even bigger problem which I want policymakers to wrap their heads around: chronic public pension deficits are deflationary.

Let me repeat that: Chronic and out of control public pension deficits are DEFLATIONARY. Why? Because it forces governments to introduce more property taxes or utility rate increases (another tax) to address them, leaving less money in the hands of consumers to spend on goods and services.

The other problem with raising taxes and utility bills is they are regressive, hurting the poor and working poor a lot more than Chicago's ultra rich. 

Now I'm going to have some idiotic hedge fund manager tell me "The answer is to cut defined-benefit pensions and replace them with cheaper defined-contribution plans." NO!!! That is a dumb solution because the brutal truth on DC plans is they are failing millions of Americans, exposing them to pension poverty which is even MORE DEFLATIONARY!!

I want all of you to pay attention to what is going on in Chicago because it's a cancer which will spread throughout parts the United States where chronic pension deficits are threatening municipalities, cities and states. And this slow motion train wreck will have drastic economic consequences for the entire country.

For Kaoru Sekiai, getting steady returns for his pension clients in Japan used to be simple: buy U.S. Treasuries.

Compared with his low-risk options at home, like Japanese government bonds, Treasuries have long offered the highest yields around. And that’s been the case even after accounting for the cost to hedge against the dollar’s ups and downs -- a common practice for institutions that invest internationally.

It’s been a “no-brainer since forever,” said Sekiai, a money manager at Tokyo-based DIAM Co., which oversees about $166 billion.

That truism is now a thing of the past. Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis. It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history (click on image).

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. With everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”

DIAM’s Sekiai has been shunning Treasuries since April, a month after foreign holdings of U.S. debt hit a record. Instead, he favors bonds of France and Italy because they “offer some degree of yield and the currency-hedging costs are cheap.” That shift lines up with the latest available Treasury Department data, which showed that demand from non-U.S. investors in April and May was the weakest in a two-month stretch since 2013.

The fact that yields on 10-year Treasuries are still way higher than those in Japan or Germany is part of the reason foreigners are having such a hard time actually profiting from the difference. Negative interest rates outside the U.S. have caused a surge in demand for dollars and dollar assets, pushing up the cost to get into and out of the greenback at the same exchange rate to levels rarely seen in the past.

Ten-year yields in the U.S. are currently about 0.23 percentage point below a basket of bonds from Australia, France, Germany, Italy, Japan, Spain and Switzerland on a hedged basis, versus 1.4 percentage points above on an unhedged basis, according to data compiled by BlackRock. At the start of the year, hedged Treasuries yielded over a half-percentage point more.

In Japan, where 10-year government bonds yield less than zero, the advantage for Treasuries has dwindled from a percentage point at the start of the year to less than 0.1 percentage point now. Without much added value for overseas investors, it’s harder to see foreign demand driving Treasuries to new records, especially as the Federal Reserve moves toward gradually raising rates.

Since falling to a record 1.318 percent on July 6, yields on 10-year notes have backed up as a string of economic reports such as last week’s jobs data bolstered the case for higher rates. They were at 1.59 percent today.

For a large swathe of institutional investors, especially those with conservative mandates, hedging is the norm when they go abroad. It eliminates the need to worry about the daily ebbs and flows in exchange rates and how that might affect their returns. When it comes to Treasuries, overseas buyers usually lock in a fixed exchange rate on the interest payments they get in dollars.

Conversion Costs

In that trade, the cost to convert payments from one currency to another is determined by the cross-currency basis swap. Take Japanese insurers as an example. Under normal circumstances, they would swap their yen for dollars and get interest on the yen they loaned out over the course of the contract.

But now, because the rate has turned negative, they’re effectively paying interest to lend the yen, which eats into their bond returns. That’s on top of the Libor rate they’ll need to pay for borrowing the dollars, which currently stands at 0.79 percent over three months.

The basis, as it’s known, was at minus 0.6425 percentage point for yen-based investors, which is close to the most expensive in five years. For those with euros, the basis is minus 0.43 percentage point. That’s more than twice as costly as the average over the past three years.

In a perfectly efficient market, none of this would matter. Differences in interest rates would be perfectly offset by the cost of exchanging two different currencies over time. But in the real world, things are far messier.

As unconventional monetary policies in Japan and Europe pushed yields lower and lower in recent years, demand for dollars has soared in tandem with the currency’s appreciation. Banks responded by demanding stiffer terms to swap into dollars as supply diminished, cutting into profits on the “carry trade” in Treasuries.

Treasuries will remain a better alternative for many overseas investors as long as an advantage exists, no matter how small the hedged yield pickup has become, according to Ralph Axel, a bond analyst at Bank of America Corp.

“They’ll just keep buying,” Axel said. Because of forces like negative rates and quantitative easing outside the U.S., “you clearly have a long-lasting bid.”

Of course, there’s the flip side. The overwhelming demand for U.S. currency is proving to be a boon for American investors and foreign central banks sitting on billions of dollars. Pacific Investment Management Co. also says there’s profit to be made by getting paid to swap dollars into yen.

Interest-Rate Swaps

Overseas money managers, though, have had to turn to more novel solutions to avoid the onerous hedging costs. Jack Loudoun, who helps oversee about $88 billion for Vontobel Asset Management in Zurich, says he prefers interest-rate swaps and futures on Treasuries to get exposure to the U.S. market because lower upfront costs help reduce foreign-exchange risk.

“We’re using derivatives to get access,” he said. “If you’re worried about hedging cost, swaps and futures are the avenues to go down.”

Whatever the strategy, there’s little debate over how important foreign demand is for the $13.4 trillion market for Treasuries.

“We’re at a point now where investors have to start thinking about this,” said Sachin Gupta, a foreign-bond fund manager at Pimco, which oversees $1.51 trillion. “As the cost of hedging rises to such an extent, there’s no extra carry to be had. That itself will slow down the demand -- and, at some point, even reverse the demand -- for Treasuries.”

Illinois’s largest public pension agrees with Bill Gross’s admonishment that it’s time to face up to the reality of lower returns and reduce assumptions about what funds can make off stocks and bonds.

Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.

Illinois’s largest state pension, the $43.8 billion Teachers’ Retirement System, plans to take another look at how much it assumes it will make in the coming year as part of an asset allocation study, said Richard Ingram, executive director. Currently it assumes 7.5 percent, lowered from 8 percent in June 2014. Plans for the study were in place before Gross made his remarks.

“Anybody that doesn’t consider revisiting what their assumed rate of return is would be ignoring reality,” Ingram, whose pension is 41.5 percent funded, said in a phone interview. The fund has yet to report its June 30 return.

Lowering how much pensions assume they can earn from investment of assets could put many in the difficult position of having to cut benefits or ask for increased contributions from workers and state and local governments that sponsor them or risk seeing the amount of assets needed to pay future benefits shrink. The $3.55 trillion of assets now held by public pensions is about two-thirds the amount needed to pay retirees, according to Federal Reserve data.

Since the financial crisis, the interest rates earned on bonds have remained low as stock prices have brought strong returns some years and more modest returns in other years. Calpers earned 0.6 percent in the fiscal year ended June 30, with an average gain of 5.1 percent over 10 years.

Illinois is struggling with $111 billion of pension debt, and more than half of that, or about $62 billion, is for the Teachers’ Retirement System. The partisan gridlock that spurred the longest budget impasse in state history only exacerbated the problem. Governor Bruce Rauner and lawmakers have made no progress in finding a fix for the rising liabilities that helped sink Illinois’s credit rating to the lowest of all 50 states.

Lagging Returns

Others also have reported meager returns recently, including a 0.19 percent gain for New York state’s $178.1 billion retirement system and a 1.5 percent increase in New York City’s five pension funds with $163 billion of assets, the smallest gain since 2012.

Government-retirement systems have lagged return targets after U.S. stocks declined last year and bond yields hold near record lows, leaving little to be made from fixed-income investments. Large plans have an average of 46 percent of their money in equities, with 23 percent in bonds and 31 percent in other assets such as private equity, Moody’s Investors Service said in a July 26 report, citing its review of fund disclosures.

“If investment returns suffer, you have to look at reality until we return to a more normal investment environment,” said Chris Mier, a municipal strategist with Loop Capital Markets in Chicago. “Some pensions don’t like changing those assumptions because then their liabilities increase.”

Pensions’ push into stocks and other high-risk investments have exacerbated pressures on the funds because of the “significant volatility and risk of market value loss” at a time when governments have little ability to boost contributions if returns fall short, Moody’s said in its report.

Dialing Back

Public pensions over 30-year-or-so horizons traditionally could hit targets for returns of 7 percent to 8 percent. But that was in an era before the Fed began holding down interest rates to stimulate the economy and returns in the stock market were not high enough to offset lower fixed-income investments.

Public pensions have been reducing assumed rates of returns, cutting from a median of 8 percent six years ago to 7.5 percent currently, said Keith Brainard, who tracks pensions for the National Association of State Retirement Administrators. Now “more than a handful” are below 7 percent, he said.

“We’ve seen a pronounced decline in return assumptions,” said Brainard.

Public pensions have been hurt by the Fed’s zero-rate policy that Gross says has led to “erosion at the margins of business models” such as the ones used for funding public pensions, which depend on assumptions about returns over time horizons of 30 years or more.

“Pensions have to adjust,” said Gross. “They have to have more contributions and they have to reduce benefit payments.”

Public pension funds have soured on hedge funds.

The New Jersey Investment Council last week voted to cut its target allocation to hedge fund managers by 52 percent, following similar moves by pensions in California and New York. The institutions are disappointed by the combination of high fees and modest returns the hedge funds have delivered.

The chart below explains some of that unhappiness. In the 10-years ended June 30, the $60.6 billion Massachusetts public fund realized a 3.2 percent average annual return, net of fees, from the hedge funds in which it invests. That was the worst performance of seven asset classes the fund holds, according to data released last week for the Pension Reserves Investment Trust Fund. Private equity, with a 14.4 percent annual gain, was the top performer. The fund overall returned 5.7 percent a year.

It’s not that Massachusetts picked especially bad managers. Its hedge fund returns are roughly in line with industry averages. The fund weighted composite index created by Hedge Fund Research Inc. gained 3.6 percent a year over the same stretch.

Unlike some of its peers, Massachusetts hasn’t reduced its roughly 10 percent allocation to hedge funds. Rather, the pension in 2015 began making investments in the asset class through managed accounts rather than co-mingled accounts. The strategy has resulted in fee discounts of 40 to 50 percent, said Eric Nierenberg, who runs hedge funds for Massachusetts’ pension.

“We are hedge fund skeptics,” he said in an e-mailed statement. The investments made through the new structure have performed “considerably better” than the pension’s legacy holdings, Nierenberg said.

The Ontario Teachers’ Pension Plan – along with RedBird Capital Partners and Aethon Energy Management – will acquire J-W Energy’s assets in north Louisiana and northeast Texas.

Redbird, a North American-based principal investment firm, and Aethon, a Dallas-based onshore oil and gas investor, have partnered with the pension plan to purchase oil and gas upstream and midstream assets. Additional assets obtained in the partnership will be combined with the J-W assets to form a joint group, Aethon United.

“We are looking forward to partnering with Aethon, a proven firm with an exceptional track record and strong alignment with Ontario Teachers’, as well as expanding our strategic relationship with RedBird,” said Jane Rowe, senior vice-president of private capital at Ontario Teachers’. “These assets are a strong fit with our private equity energy portfolio and represent a compelling investment opportunity with an established base of long-life proven reserves and attractive growth opportunities.”

The Texas and Louisiana properties comprise approximately 84,000 acres and 380 miles of gathering and processing infrastructure which, added to Aethon United’s existing assets, results in a 350,000 net acres, the other portion of which is made up from previous deals with Encana, Noble Energy and SM Energy.

Ontario Teachers' Pension Plan ("Ontario Teachers'") RedBird Capital Partners ("RedBird"), and Aethon Energy Management ("Aethon") today announced the acquisition of J-W Energy's ("J-W") oil & gas upstream and midstream assets located in northeast Texas and north Louisiana. Additionally, Haynesville and Rockies assets acquired in partnership by Aethon and Redbird are being consolidated with the J-W assets, forming a joint partnership ("Aethon United").

Located in north Louisiana and northeast Texas, the J-W Energy assets comprise approximately 84,000 net acres and 380 miles of associated gathering and processing infrastructure. The collective reserve base of the J-W assets combines low risk, long life, and highly predictable production with attractive development opportunities.

With this acquisition, Aethon United now operates in excess of 350,000 net acres and 166 MMcfe/d of production. In addition to the J-W Energy assets, Aethon United operates approximately 91,000 net acres in the Haynesville previously acquired from SM Energy and Noble Energy, as well as approximately 181,000 net acres in the Wind River Basin of Wyoming previously acquired from Encana.

Albert Huddleston, Founder & Managing Partner of Aethon, commented, "We are excited to partner with Ontario Teachers' and continue our long-standing partnership with RedBird to acquire J-W Energy's high quality, low risk, unconventional assets, which continues to expand our acreage in the Arkansas-Louisiana-Texas area. The J-W Energy assets help to diversify and expand our existing portfolio, and highlights Aethon's ability to identify attractive E&P assets, offering strong risk-adjusted returns in the current market environment and in the future. We are grateful for the confidence shown in the Aethon Energy team for the series of investments in partnership with us by noted investors Ontario Teachers' and RedBird, which ratifies our 26 year track record."

"We are looking forward to partnering with Aethon, a proven firm with an exceptional track record and strong alignment with Ontario Teachers', as well as expanding our strategic relationship with RedBird" said Jane Rowe, Senior Vice President of Private Capital. "These assets are a strong fit with our private equity energy portfolio and represent a compelling investment opportunity with an established base of long-life proven reserves and attractive growth opportunities."

"Aethon has been a tremendous partner with RedBird in the build-up of our collective energy investments, and we're excited to expand this partnership with our friends at Ontario Teachers' with whom we have a very strong strategic relationship," said Hunter Carpenter, Partner at RedBird Capital. "This partnership is an example of RedBird's unique ability to identify proven owners and entrepreneurs like Aethon Energy who are frequently unavailable to traditional institutional capital. Aethon Energy represents a rare combination of investing and operating expertise providing superior historical performance and operating skill."

About Aethon Energy Management

Aethon Energy Management LLC is a Dallas-based private investment firm that has managed and operated over $1.6 billion of assets, and is focused on direct investments in North American onshore oil & gas. Since its inception in 1990, Aethon has maintained a focus on acquiring under-appreciated assets where opportunities exist to add value through lower-risk development, operational enhancements and Aethon's proprietary technical knowledge. Aethon's 26-year track record spans multiple energy cycles and has consistently provided compelling asymmetric returns for its institutional and high net worth investors through disciplined buying and value creation. For more information, go to www.AethonEnergy.com.

About Ontario Teachers'

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $171.4 billion in net assets at December 31, 2015. It holds a diverse global portfolio of assets, 80% of which is managed in-house, and has earned an annualized rate of return of 10.3% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 316,000 active and retired teachers. For more information, visit www.Otpp.com and follow us on Twitter @OtppInfo.

About RedBird Capital Partners

RedBird Capital Partners is a North America based principal investment firm focused on providing flexible, long-term capital to help entrepreneurs grow their businesses. Based in New York and Dallas, RedBird seeks investment opportunities in growth-oriented private companies in which its capital, investor network and strategic relationships can help prospective business owners achieve their corporate objectives. RedBird's private equity platform connects patient capital with business founders and entrepreneurs to help them outperform operationally, financially and strategically. For more information, go to www.RedBirdCap.com.

J-W Energy Company is pleased to announce the closing on July 1, 2016 of the sale of substantially all of the oil and gas assets owned by J-W Operating Company and substantially all of the midstream assets owned by J-W Midstream Company to affiliates of Aethon United LP. The assets included in the transaction are located mainly in the North Louisiana and North Texas areas and are comprised of approximately 95,000 net acres and 380 miles of associated gathering and processing infrastructure. The sale is an exit from the upstream and midstream business by J-W Energy Company, which will continue to own the largest privately-held compression fleet in the U.S. through its wholly-owned subsidiary, J-W Power Company. Over the past ten years, J-W Energy has exited from its drilling, valve manufacturing, gas measurement and wireline businesses as well, as part of a planned reallocation of company resources.

"This exit from the upstream and midstream businesses will allow J-W Energy Company to focus on our compression business, which has been less capital intensive than the upstream and midstream businesses. Despite this sale marking the end of J-W Energy's long and successful history in the upstream and midstream businesses, we are confident that the dedicated employees of J-W Operating and J-W Midstream will be instrumental in the future success of this endeavor," said David A. Miller, President of J-W Energy Company.

Wells Fargo Securities, LLC served as the exclusive financial advisor to J-W Energy on the transaction.

J-W Midstream Company is a natural gas gathering and processing company that has been active in the gathering, dehydration, treating, processing and transmission of natural gas for over thirty years. With that experience, we understand the producer's need for high quality, cost-effective, completely reliable services.

From engineering and construction to contract gathering and processing, J-W Midstream Company is committed to providing a continuously uninterrupted flow of gas to our customers and real value to their bottom lines.

J-W Midstream Company operates more than 400 miles of natural gas pipeline systems in Louisiana and Texas, as well as processing facilities that range from small refrigeration and J-T skids to 25 MMSCFD cryogenic units.

Through an affiliate company, J-W Midstream Company can supply outsourced gas sales and other gas management functions.

A TransCanada Mexican pipeline is drawing significant interest from pension funds. Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Borealis Infrastructure Corp. have created a consortium in order to purchase up to 49.9 percent of the business, which has been estimated to be worth some US$2 billion.

Caisse de Depot et Placement du Quebec’s new Mexican joint venture, CKD Infraestructura Mexico SA, are also interested in purchasing stakes, along with three other unnamed businesses.

That information comes from a source with knowledge of the situation who spoke to Bloomberg but asked not to be identified. TransCanada spokesman Mark Cooper has confirmed the company is seeking investors but would not comment beyond that. The Calgary-based company is trying to sell its minority stake in the pipeline, along with power plants in the northeastern United States to generate cash to buy Columbia pipeline Group Inc. That deal is estimated at US$10.2 billion.

Mexico is increasingly drawing the attention of investors. The country recently began a US$411 billion plan for its infrastructure, focusing on transportation and energy. Canada Pension and the Ontario Teacher’s Pension Plan already made an investment last month in a toll road operator in Mexico.

In June, the company announced it would build and operate a US$2.1 billion natural gas pipeline in Mexico. The company said it would parent with Sempra Energy’s IEnova unit, with TransCanada owning a 60 percent stake in the venture. The effort will be backed by Mexico’s state-owned power company and is expected to be in service by 2018. TransCanada recently made news in the United States when it announced a lawsuit against the state because of the suspension of the controversial Keystone XL pipeline project.

The Ontario Teachers’ Pension Plan and the Public Section Pension Investment Board will buy out Banco Santander’s interest in Cubico Sustainable Investments. The three firms launched the London-based renewable energy and water infrastructure company in May 2015.

After the acquisition, PSP Investments and Ontario Teachers’ will each own 50 per cent of Cubico’s shares.

Cubico’s initial portfolio included 18 water, wind and solar infrastructure assets with a net capacity of 1.2 gigawatts. The company has since acquired four new assets, bringing its net capacity to 1.62 gigawatts. Cubico’s 22 assets are in Brazil, Italy, Ireland, Mexico, Portugal, Spain, United Kingdom and Uruguay.

“Our increased participation in Cubico is aligned with PSP Investments’ long-term investment approach and strategy to leverage industry-specific platforms and develop strong partnerships with liked-minded investors and skilled operators,” Guthrie Stewart, senior vice-president and global head of private investments at PSP Investments, said in a release.

“Cubico’s flexible investment and acquisition approach fits well with Ontario Teachers’ approach to private investments,” Andrew Claerhout, senior vice-president of infrastructure at Ontario Teachers’ said in the release.

Okay, this really is one weird market.

I am looking at the hedge fund proxy market positioning from the latest Commitments of Traders report from the Commodity Futures Trading Commission, and the results are startling. I’m quite sure I have not seen such levels of confidence on one hand, and cognitive dissonance on the other, before in my entire professional life (and that spans 30 years).

First, there is a very large net speculative long position on the Chicago Board of Trade (CBOT) with respect to the 10-year U.S. Treasury note — a 96,007 futures and option contract net long position to be exact.

This has doubled since the aftermath of the Brexit vote, and this congestion may well be the reason why yields have stopped going down (actually up 25 basis points from the nearby lows) — the buying power has been exhausted.

The speculators have been net long the U.S. Treasury market each and every week since June 14th. Once these trapped longs exit the market, it will be safe to dip your toes back in but not likely before.

Yet, at the same time, the net speculative position on 30-day Fed funds has gone short — to 96,712 futures and options contracts from 31,600 at the end of June, so if anything, the hedge funds have become more convinced that the Fed is going to hike. And yet, they have also stepped up their long positions on the 10-year note.

Maybe they think the Fed goes, but it will be a mistake and send the economy back into a deflationary downturn.

But how can that be the case when this same “smart money” crowd has built up a net speculative long position in the S&P 500 to the tune of 28,809 futures and options contracts?

This net long position has nearly doubled since late June and you have to go all the way back to April 26th to find the last time that these folks were net short. The net speculative position on the CBOT in terms of the Dow has soared to a record 38,382 futures and options contracts.

As for the NASDAQ, the net speculative longs have nearly tripled since late June to 26,014 net speculative futures and options contracts, a level only surpassed a handful of times in the past. To say that market positioning is wildly extreme right now would be an understatement.

The “greed” factor is also highly evident on the Chicago Board Options Exchange (CBOE) where net speculative shorts on the VIX have reached 114,603 futures and option contracts, a level reached only once before. The bull market is in complacency.

But this begs the question, if there is no fear, then how is it that the net speculative position on gold on the COMEX is back near an all-time high of 326,264 futures and options contracts?

Rare is the day that record net longs here coincide with record net longs in the Dow. Ditto for silver, where the net speculative long position has soared to an unheard-of 96,782 futures and options contracts.

And yet, even with these commodities priced in U.S. dollars, the net speculative position on the trade-weighted dollar itself is 15,560 futures and options contracts on the Intercontinental Exchange (ICE).

So you see what I mean by cognitive dissonance, right?

Long bonds, short the Fed funds futures. Long equities but long bonds. Long gold but long equities. Long the dollar and long the precious metals.

At the same time, if risk appetite is so acute, why then are these people long the U.S. market and the large caps and at the same time short the emerging market equity space (which is outperforming by the way) with a net short position of 13,319 futures and options contracts (highest in 15 months) and a net short position on the small caps (1,948 futures & options contracts on the Russell 2000 on the ICE)?

It is next to impossible to make sense out of this; I’m not even sure Graham or Dodd could if they were still alive.

And this also seems surreal with respect to the Canadian economy. An economy contracting at roughly a two per cent annual rate. More than 100,000 full-time jobs lost in the past two months. A record-high $40 billion trade deficit. Exports sagging at a 20 per cent annual rate. About 30 per cent odds of a Bank of Canada rate cut priced in. A housing bubble so pernicious that British Columbia boosted the land transfer tax to 15 per cent for non-residents. And no Olympic gold medal just yet, either.

And yet here we have a situation where the net speculative position on the Canadian dollar has almost doubled in the past five weeks to 19,237 futures and options contracts on the Chicago Mercantile Exchange.

You have go all the way back to April 5th to see the last time the “smart money” was net short the loonie. My big concern is that this money has turned a bit “dumb” on this bet.

Imagine an entire enterprise set on course for disaster, driven by the owner’s arrogant pursuit of profit. The members of the management team, from the CEO on down, know better but fail to resist or are ignored. The clients remain totally unaware of the risks until far too late, with catastrophic results -- particularly for the poorest among them.

This is the story line of the excellent "Titanic," a musical now playing at the Charing Cross Theatre in London. As I took in this powerful portrayal of the human failures that brought down a ship thought to be unsinkable, it occurred to me that if we're not careful, the tragic story could also end up describing the fate of the global retirement system.

With interest rates extremely low and the prices of stocks and bonds at historic highs, finding safe investments that can help guarantee a comfortable retirement has become increasingly difficult. This has put the managers of pension funds and other institutions that invest on behalf of future retirees in a difficult position, driving them to take ever greater risks in hopes of meeting their performance objectives -- targets that are unlikely to be met absent a major revamp of economic policies and corporate prospects. As a result, individuals are increasingly being exposed to the threat of losses that cannot be recouped quickly.

The degree of long-term financial security that can be assured depends on three elements: future returns, correlations among different asset classes and volatility. The outlook for all three is becoming more uncertain.

What returns can investors realistically expect? With the combination of central bank activism and less robust economic prospects pushing bond yields into negative territory (most recently in the U.K.), fixed income markets no longer generate any meaningful returns -- unless one takes on a lot more default risk by accumulating junk debt issued by corporations and emerging-market governments. In the stock market, high-quality dividend-yielding shares have reached unnerving valuations, leaving more volatile and risky options.

More sophisticated investors may be able to access investment vehicles that traffic in less crowded areas -- but selecting the right manager is not easy, especially in a “zero sum” world in which one manager’s positive “alpha” is another’s losses.

In principle, the right mix of investments can provide greater return for the same risk. But this works only if the investments don’t move in sync -- and correlations among asset classes have lately become unstable and less predictable. Sophisticated long-term investors realize that portfolio diversification, while still necessary, is no longer sufficient for proper risk mitigation. Yet the next operational step is not easy, and it typically involves giving up some potential return.

Then there's volatility, which increases the chances that an investment will fall in value precisely when a future retiree needs the money. In recent years, central banks have largely been willing and able to repress financial volatility. Now, though, this is changing. Some, such as the Bank of Japan, appear less able while others, such as the Federal Reserve, somewhat less willing.

The repercussions for investment managers depend on where they stand. Those who oversee severely underfunded corporate or public defined-benefit pension plans are in a particularly tough bind: They must achieve high returns to meet their targets, so they face the greatest pressure to take on risks that could be catastrophic if companies and the economy don’t perform well enough to justify existing asset prices. Even better-funded pension plans that have matched their assets to their liabilities will be challenged to maintain historical returns if they take on new entrants.

To avoid disaster, policy makers and investment managers should consider three fixes. First, be a lot more realistic about the returns that can be achieved within traditional risk tolerance parameters. Second, put in place policies to boost savings and income, so people -- particularly the most vulnerable -- will have more money available to put aside for retirement. Third, be transparent with retirees about the risks that are being taken on their behalf, also offering less risky options with explicitly lower expected returns.

Absent urgent change, the retirement system could end up following the example of the Titanic. Like the ship’s passengers, many individuals would face the risk of devastating consequences. And like the second- and third-class passengers who had a hard time getting on lifeboats, the middle- and low-income segments of the population would be most at risk.

Deep thinker and clearly global guy Mohamed El-Erian probably needs to decide on the sense in which he wants to use the word titanic. Is it a large thing or an overrated thing?

He wrote this and Bloomberg published it:

This is the story line of the excellent “Titanic,” a musical now playing at the Charing Cross Theatre in London. As I took in this powerful portrayal of the human failures that brought down a ship thought to be unsinkable, it occurred to me that if we’re not careful, the tragic story could also end up describing the fate of the global retirement system.

The issue El-Erian chooses to use as a segue into his London theatre preferences and his favorite theme that uncertainty could rise is actually an important one. It would be great to see some reporting on it.

Financial market returns are going to be much lower than pension plans assume. This is an issue for companies offering defined benefit plans, as well as their beneficiaries. And even for defined contribution plans or just 401ks, beneficiaries broadly defined are probably in for a rude awakening.

It is darkly funny that this issue receives such little attention compared to the endless moaning, whining and gnashing of teeth around DA NATIONAL DEBT!!!!

At some risk of being self-referential too, I think this issue of pressure on pensions fits into the point that equities can be BOTH not significantly overvalued AND likely to generate very subpar returns. In slight contrast, bonds may be overvalued, but are now almost certain to deliver low returns, by definition if held to maturity.

There's an even bigger problem which I want policymakers to wrap their heads around: chronic public pension deficits are deflationary.

Let me repeat that: Chronic and out of control public pension deficits are DEFLATIONARY. Why? Because it forces governments to introduce more property taxes or utility rate increases (another tax) to address them, leaving less money in the hands of consumers to spend on goods and services.

The other problem with raising taxes and utility bills is they are regressive, hurting the poor and working poor a lot more than Chicago's ultra rich. 

Now I'm going to have some idiotic hedge fund manager tell me "The answer is to cut defined-benefit pensions and replace them with cheaper defined-contribution plans." NO!!! That is a dumb solution because the brutal truth on DC plans is they are failing millions of Americans, exposing them to pension poverty which is even MORE DEFLATIONARY!!

I want all of you to pay attention to what is going on in Chicago because it's a cancer which will spread throughout parts the United States where chronic pension deficits are threatening municipalities, cities and states. And this slow motion train wreck will have drastic economic consequences for the entire country.

[...] I remain highly skeptical that anything policymakers do now will be enough to resurrect global inflation. Readers of my blog know that rising inequality is just one of six structural themes as to why I'm worried of a global deflationary tsunami:

• The global jobs crisis: Jobs are vanishing all around the world at an alarming rate. Worse still, full-time jobs with good wages and benefits are being replaced with part-time jobs with low wages and no benefits.
• Demographics: The aging of the population isn't pro-growth. As people get older, they live on a fixed income, consume less, and are generally more careful with their meager savings. The fact that the unemployment rate is soaring for younger workers just adds more fuel to the fire. Without a decent job, young people cannot afford to get married, buy a house and have children.
• The global pension crisis: A common theme of this blog is how pension poverty is wreaking havoc on our economy. It's not just the demographic shift, as people retire with little or no savings, they consume less, governments collect less sales taxes and they pay out more in social welfare costs. This is why I'm such a stickler for enhanced CPP and Social Security, a universal pension which covers everyone (provided governments get the governance and risk-sharing right).
• Rising inequality: Rising inequality is threatening the global recovery. As Warren Buffett once noted, the marginal utility of an extra billion to the ultra wealthy isn't as useful as it can be to millions of others struggling under crushing poverty. But while Buffett and Gates talk up "The Giving Pledge", the truth is philanthropy won't make a dent in the trend of rising inequality which is extremely deflationary because it concentrates wealth in the hands of a few and does nothing to stimulate widespread consumption.
• High and unsustainable debt in the developed world: Government and household debt levels are high and unsustainable in many developed nations. This too constrains government and personal spending and is very deflationary.
• Technology: Everyone loves shopping on-line to hunt for bargains. Technology is great in terms of keeping productivity high and prices low, but viewed over a very long period, great shifts in technology are disinflationary and some say deflationary (think Amazon, Uber, etc.).

Why am I bringing this up? Because the stock market is acting as if reflationary policies will succeed while the bond market is preparing for a protracted deflationary episode.

And while some think negative yields outside the US are "distorting" the US bond market, I would be very careful here because the fact remains Asia and Europe remain mired in deflation which can easily spread to the United States via lower import prices. So maybe the bond market has it right.

To avoid disaster, policy makers and investment managers should consider three fixes. First, be a lot more realistic about the returns that can be achieved within traditional risk tolerance parameters. Second, put in place policies to boost savings and income, so people -- particularly the most vulnerable -- will have more money available to put aside for retirement. Third, be transparent with retirees about the risks that are being taken on their behalf, also offering less risky options with explicitly lower expected returns.

The rally in global equities over the preceding month had taken investors by surprise, coming as it did right after the referendum vote opened-up a proverbial 'Pandora´s Box' of political uncertainty, but several developments in global capital markets warranted watching, Morgan Stanley´s strategy team said.

Nonetheless, Morgan Stanley's Managing Director Graham Secker did concede that the rally had taken place against the backdrop of the G10 economic surprise index rising to a two-and-a-half-year high.

Indeed, "surprisingly, the UK currently has the highest economic surprise index reading of any major region", he said.

Among the developments to monitor are:

1. Five-year, five-year inflation breakevens stateside started to fall in the latest week, after having risen before, which would make the rally in stocks look vulnerable if that trend continued.

In this regard, Secker noted how the Chinese yuan - a key driver of inflation expectations in 2016 - had been making new lows of late on a trade-weighted basis.

2. The Chicago Board of Options Exchange´s volatility index, or VIX, the acronym by which it was known in markets, had plummeted below the 12.0-point level to close to record-lows despite "high" political uncertainty.

"If the recent spike in policy uncertainty normalizes soon, then this current disconnect is not particularly worrisome for markets; however, such a scenario strikes us being rather optimistic," Secker said.

3. At 22.0%, net short positioning in the VIX was at its lowest in three years. Troughs in that speculative positioning usually coincided with tactical peaks in markets, the strategist pointed out. Since 2010, on the other ocassions when the VIX had hit similar levels, on average declines of 2% in European equities ensued over the subsequent one and three months, he added.

4. Investors had gone net long both US equities and US Treasuries by two standard deviations. Such an occurence had only been witnessed three times over the past 30 years, in 2000, 2006 and 2012. For its part, the RSI for the German Dax had moved above 70 and the broker´s Global Risk Demand Index (GRDI) was above +1 standard deviations.

5. The breadth of the outperformance by high-beta stocks had been the greatest since 2012, with 87.0% of European high-beta shares outperforming over the last month. That has also been seen three times in the past, in April 2009, March 2010 and January 2012.

Because of what they perceive to be growing risks in the economy and world, the world's 2,473 billionaires are keeping 22.2 percent of their total net worth in cash, according to the Wealth-X Billionaire Census.

The group has also benefited from the recent surge in so-called liquidity events from corporate acquisitions and mergers. Altogether, their cash hoard is now roughly the size of the Brazil's GDP.

"Billionaires are taking money off the table where available, while uncertainties in the economy and the historical highs found in deals have resulted in cash-flush portfolios," the report said.

The firm's findings are in line with those from other recent surveys. A study released by UBS last month said wealthy Americans are keeping around 20 percent of their portfolios in cash, in line with their post-2008 average. More are considering reducing their exposure to the markets because of uncertainty over the presidential election, UBS said.

Burdick, who had been head of distressed debt and arbitrage groups before his promotion in January, will remain in his current post until a replacement is found and then will return to running a credit portfolio at the firm, according to people familiar with the matter. Soros Fund Management is looking for a CIO candidate with experience in macroeconomic investing, said one of the people, asking not to be identified because the information is private.

The last time the Dow Jones industrial average, Nasdaq and S&P 500 closed together at new highs was Dec. 31, 1999. Bill Clinton was in the White House, "The Green Mile" was in theaters and the dot-com bubble was nearing its apex. In March 2000, that bubble burst and all three indexes plunged.

Since then, it's been more than 4,000 trading days without seeing new highs together.

But before investors start running for the exits, there's something very important to note: 1999 was the end of a long bull run that saw those same three indexes close at record highs together a stunning 131 times from 1986 to 1999, according to the Kensho analytics tool. So even though Thursday's "trifecta" has not happened in a long time, it does not indicate a higher likelihood of a sudden downward move now.

It was a different story in 1999.

By the end of 2000, the Nasdaq was down 39 percent, the Dow 6 percent and the S&P 500 10. Two years after reaching their historic highs together, the Nasdaq had lost half its value, and closed down 52 percent on Dec. 31, 2001. The S&P 500 closed down 22 percent in that time and the Dow 13 percent.

After that, it wasn't until October 2006 that the Dow 30 got back to its previous high. The S&P 500 didn't until May 30, 2007.

Some of the discord in not reaching new highs together is due to the Nasdaq, which only re-reached its 2000 high in April 2015. The Dow and the S&P 500 have hit highs together many times since then, mostly in 2013 and 2014.

Julia La Roche of Yahoo Finance reports, Legends of finance have big bets on the stock market going down:

Famous global macro hedge fund manager Paul Tudor Jones, the founder of Tudor Investment Corp, doubled-down on his bet against the stock market, according to his fund’s most recent 13-F filing.

During the second quarter, Tudor Investment bought put options on over 5.95 million shares of the SPDR S&P 500 ETF (SPY). The fund now owns puts on 8.34 million shares of the exchange-traded fund, making it the fund’s largest position, the filing shows.

Puts gain value when the price of an asset falls. Buying these SPY puts gives the fund the right, but not the obligation, to sell shares at a set price. If the S&P 500 or the ETF that it tracks falls, Tudor Investment should profit handsomely as it would effectively be able to buy at a low price and then sell at the put’s price.

Tudor Investment also owns call options on just over 1.43 million shares of the SPDR S&P 500 ETF. The fund added call options on approximately 420,700 more shares during the second quarter, the filing shows. Calls give the fund the right to buy at a certain set price.

Jones, who is famous for nailing the “Black Monday” October 1987 stock market crash, is not alone in his bet against the S&P.

Jones joined George Soros

Legendary hedge fund manager George Soros also doubled down on his bet against the S&P, buying put options on just over 1.9 million shares the SPDR S&P 500 ETF, making it so he owns puts on just over 4 million shares. It’s his fund’s biggest holding in the filing too.

Soros, 86, is widely known as the man who “broke the Bank of England” following his short bet against the British Pound in 1992 while running the Quantum Fund alongside Stanley Druckenmiller. Ahead of the June 23rd Brexit vote, Soros had warned that a decision to leave the EU would be more disruptive than “Black Wednesday.”

On June 30, the last day of the second quarter, Soros gave a grim speech to the EU Parliament where he highlighted these concerns.

Soros warned that the Brexit may be a “greater calamity” than the refugee crisis. He added that the UK’s shocking decision has “unleashed a crisis in the financial markets comparable in severity only to that of 2007/8.”

Markets initially sold off following the UK’s stunning decision to leave the EU. However, they have since rallied back. Stocks lately have been hitting all-time highs.

Hedge funds of a certain size are required to disclose their long stock holdings in filings known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. What’s more is these filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the position. Still, it does provide a glimpse into where some of the top money managers have been placing money in the stock market.

In my last comment on the stock market rally everyone hates, I stated the following:

So are the world's billionaires right to hoard so much cash? Maybe they've been listening to George Soros's dire warnings but so far he's been wrong on China and he was wrong calling for another 2008 crisis earlier this year and more recently, he was wrong about Brexit being a cataclysmic event.

In June, Soros came out of retirement to manage his fortune, a move that received a lot of attention in the press, and last week we learned Ted Burdick is stepping down as chief investment officer for Soros’s $25 billion family office after less than a year in the role:

Burdick, who had been head of distressed debt and arbitrage groups before his promotion in January, will remain in his current post until a replacement is found and then will return to running a credit portfolio at the firm, according to people familiar with the matter. Soros Fund Management is looking for a CIO candidate with experience in macroeconomic investing, said one of the people, asking not to be identified because the information is private.

What do I read into this latest CIO move at Soros Fund Management? Not much, Soros changes CIOs and portfolio managers more than he changes his shoes, he's got a reputation for being ruthless when it comes to his internal and external managers.

But it's a tough macro environment and even the great George Soros is having difficulty making sense figuring out markets that are confounding smart money.

The question is Soros really bearish or is he playing everyone for fools while he goes long risk assets? This week I will go over top funds' activity for Q2 2016 in detail but one thing that worries me is the surging yen because it could trigger another crisis, in particular another Asian financial crisis. This is why back in early May I said it feels more like 1997 than 2007.

Now we know Soros doubled down on his bet against the S&P, buying put options on just over 1.9 million shares the SPDR S&P 500 ETF, making it his fund’s biggest holding in the filing.

What else do we know? Soros slashed his gold shares in the second quarter of 2016:

Soros Fund Management LLC sharply cut its shares in SPDR Gold Trust and Barrick Gold Corp in the second quarter of 2016, 13F-HR filings with the U.S. Securities and Exchange Commission showed on Monday.

The fund reduced its holdings in SPDR Gold Trust, the world's biggest gold exchange-traded fund, to 240,000 shares worth $30.4 million, from 1.05 million shares in the first quarter.

It cut its shares in Barrick Gold Corp to 1.07 million shares worth $22.9 million, from 19.4 million shares in the first three months of 2016, the filing showed.

Soros's bearish bets on the S&P have yet to pan out, which is why his fun is underperforming so far this year, but he wisely took his profits in gold shares during the second quarter of the year.

And he wasn't alone. Even Paulson & Co cut its stake in the gold-backed exchange-traded fund SPDR Gold Trust in the first quarter of 2016. I warned all you beware of anyone telling you to sell everything except gold!

It's that time of the year again when we all get to peek into the activity of top funds, with a 45-day lag. Unlike previous comments tracking top funds, I began this comment on a sobering macro note because too many people focus on what stocks to buy without paying attention to the macro environment, and this can cost them dearly.

Still, the way stocks have been grinding higher, making record highs, you wonder if the smart money is as smart as it claims or maybe it's just very confused, getting killed by central banks desperately trying to reflate risk assets at all cost.

That was my preamble to my comment on top funds' Q2 activity. You can read many articles on 13F filings on Barron's, Reuters, Bloomberg, CNBC, Forbes and other sites like Insider Monkey, Holdings Channel, and whale wisdom.

My favorite service for tracking top funds is Symmetric run by Sam Abbas and David Moon but there are other services offered by market folly and you can track tweets from Hedgemind and subscribe to their services too. I also like Dataroma which offers a lot of excellent and updated information on top funds and a lot more on insider activity and crowded trades.

Julia La Roche of Yahoo Finance did a good job going over a lot of activity in her comment, Here are the stocks the hedge fund titans have been buying and selling:

The stocks that hedge funds bought and sold during the second quarter are being revealed throughout the day, and some big names have made big moves.

Hedge funds of a certain size are required to disclose their long stock holdings in filings known as 13-Fs. Of course, the filings only provide a partial picture since they do not show short positions or wagers on commodities and currencies. What’s more is these filings come out 45 days after the end of each quarter, so it’s possible they could have traded in and out of the position. Still, it does provide a glimpse into where some of the top money managers have been placing money in the stock market.

Facebook loses a friend

Billionaire David Tepper of Appaloosa Management sold his fund’s 1.62 million shares of Facebook (FB), while billionaire Daniel Loeb’s Third Point LLC bought 3.75 million shares of the social network in the second quarter, a position valued at $428,550,000 on June 30. Shares of Facebook have risen more than 9% since the end of the quarter. Year-to-date, the stock is up more than 19%.

Billionaire Julian Robertson’s Tiger Management reduced its position in Facebook in the quarter, selling 25,500 shares, leaving the fund with a 186,500 shares, a position valued at $21.3 million at the end of the quarter.

Citi gains favor

Billionaire value investor Seth Klarman of Baupost Group and billionaire Leon Cooperman of Omega Advisors both initiated new positions in Citigroup (C) in the second quarter. Shares of Citigroup have gained more than 9% since the end of the second quarter.

Omega’s Cooperman also initiated a new position in Netflix (NFLX), while Robertson’s Tiger Management exited its stake that it first initiated in the fourth quarter of 2014. Shares of Netflix saw a monstrous rise since Robertson opened his stake, climbing around 88% through the end of the second quarter. So far, shares of Netflix have risen close to 5% since the end of the second quarter.

Tiger Global’s public equities business also ditched its entire stake in Netflix, a position that had been worth around $1.8 billion at the end of the first quarter.

Baupost’s Klarman and Appaloosa’s Tepper both added to their stakes in Allergan (AGN) in the second quarter. The pharma stock has risen more than 9% since the end of the second quarter.

Funds split on Apple

Warren Buffett’s Berkshire Hathaway boosted its stake in Apple by 55%, bringing its position to north of 15.2 million shares from 9.8 million.

George Soros’ family-office hedge fund Soros Fund Management sold its entire stake in Apple during the second quarter. Soros had held 3,100 shares of Apple, which he bought in the first quarter.

Here’ a rundown of what the hedge fund titans have been buying and selling:

Appaloosa Management (David Tepper)
New: Western Digital (WDC)
Trimmed: HCA Holdings (HCA)
Added: Allergan (AGN), Alphabet (GOOG), Allstate Corp (ALL), Mohawk Industries (MHK), Western Digital (WDC)
Exited: Bank of America (BAC), Cabot Oil & Gas (COG), Southwestern Energy Company (SWN), Range Resources Corporation (RRC), Pfizer (PFE), Teekay Offshore Partners (TOO), Delta Airlines (DAL), Facebook (FB), Tenet Healthcare Corp (THC), United Rentals (URI), Antero Resources Corporation (AR), Valeant (VRX)

Baupost Group (Seth Klarman)
New: Citigroup (C), Liberty Ventures (LVNTA), The Liberty Braves Group (BATRK), Paratek Pharmaceuticals (PRTK), Cascadian Therpeutics (CASC), Och-Ziff Capital Management (OZM), The Liberty Braves Group (BATRA)
Trimmed:  Antero Resources (AR), PayPal Holdings (PYPL), Innoviva (INVA), NovaGold Resources (NG)
Added: EMC Corporation (EMC), Allergan (AGN)
Exited: La Quinta Holdings (LQ), Genworth Financial (GNW), Bellatrix Exploration (BXE)

JANA Partners (Barry Rosenstein)
New: Liberty Broadband Corporation (LBRDK), Coca-Cola European Partners (CCE), Expedia (EXPE), Harris Corp. (HRS), Pinnacle Foods (PF)
Trimmed: Walgreens Boots Alliance (WBA), ConAgra Foods (CAG)
Exited: Pfizer (PFE)

Omega Advisors (Leon Cooperman)
New: Arris Group (ARRS), Shire Plc (SHPG), Citigroup (C), Netflix (NFLX)
Trimmed: Realogy Holdings Corp (RLGY)
Added: PVH Corp (PVH), Chimera Investment Corporation (CIM), Ashland (ASH)
Exited: Sirius XM Radio (SIRI), Gilead Sciences (GILD)

Starboard Value (Jeff Smith)
New: Infoblox Inc (BLOX), Medivation Inc. (MDVN) Delek US Holdings (DK), Pinnacle Entertainment (PNK)
Trimmed: Darden Restaurants (DRI), Macy’s (M), Insperity (NSP), Four Corners Property Trust (FCPT)
Added: Advanced Auto Parts (AAP), WestRock (WRK), Brinks Company (BCO)
Exited: Aecom Technology Corp (ACM)

Svea Herbst-Bayliss of Reuters also reports, Loeb's Third Point makes more new bets on energy, cuts stake in Dow:

Billionaire investor Daniel Loeb's hedge fund Third Point added new bets in the energy and information technology sectors with investments in Whiting Petroleum Corp., Facebook and Activision Blizzard Inc, according to regulatory filings on Friday.

Third Point, which invests roughly $16 billion and is widely followed because of its years of strong returns, also made new bets on Tesoro Petroleum and Devon Energy Corp. Last month Loeb wrote to investors that savvy bets on the energy market had helped the portfolio gain 4.6 percent in the second quarter, beating the broader Standard & Poor's stock market.

"We came into the year with a short credit portfolio that we reversed sharply in February, getting long over $1B in energy credit," Third Point said in its latest quarterly letter to clients. Loeb also said he sold out of Amgen because he saw better opportunities in other companies.

Among Loeb's biggest holdings, he cut his stake in Dow Chemical Co by 20 percent as the firm sold 5 million shares. At the end of the second quarter he owned 20 million shares.

Third Point made nearly two dozen new investments in U.S. stocks, which were revealed in quarterly 13F filings made with the Securities and Exchange Commission.

The filings show what stocks funds owned at the end of the last quarter.

Third Point also exited Signet Jewelers, a widely owned stock that fell 34 percent in the second quarter.

And Matt Turner and Rachael Levy of Business Insider report, A giant hedge fund could be about to shake up Morgan Stanley:

Morgan Stanley may be about to get the activist-investor treatment.

ValueAct, the activist hedge fund run by Jeff Ubben, disclosed a chunky position in the stock in the fund's 13F filing. 

The fund bought 38 million shares in the second quarter, according to the filing. The stake is valued at over $1.1 billion at Morgan Stanley's current share price.

ValueAct is an activist fund, meaning that it takes stakes in companies and lobbies for changes — everything from a new CEO or a stock buyback — in order to increase stock value. The firm managed about $17.4 billion, including borrowed money, as of earlier this year, according to a regulatory filing.

Morgan Stanley, which has a valuation of about $56 billion, is by no means the largest company that ValueAct has targeted. It has also run campaigns against Microsoft, Adobe Systems, and Valeant Pharmaceuticals.

It isn't immediately clear what ValueAct will ask Morgan Stanley for. Bloomberg News cited a letter to the bank that praised its recent moves efforts to cut lending risks and raise capital. Bloomberg's Beth Jinks said that the letter described Morgan Stanley as an activist holding.

But The Wall Street Journal cited people familiar with the matter saying that ValueAct is not planning to ask for any major changes. An external spokeswoman for the hedge fund didn't immediately reply to a call seeking clarification.

Shares of Morgan Stanley rose in after-hours trading, gaining about 1.4%.

The bank has focused on wealth management under CEO James Gorman, and in the investment bank it has de-emphasized fixed-income trading.

It is a top player in traditional investment banking and equities, but is an also-ran in fixed income. The bank cut 25% of its fixed-income workforce last year.

The US Department of Justice sued ValueAct earlier this year, accusing it of violating premerger regulations relating to the proposed deal between Baker Hughes and Halliburton in 2014. In July, ValueAct settled the case for $11 million, the highest ever settlement for that charge. ValueAct previously said that it "fundamentally disagrees" with the DOJ's interpretation.

Anyways, those of you who want to read more articles on 13F filings can do so by going to Barron's, Reuters, Bloomberg, CNBC, Forbes and other sites like Insider Monkey, Holdings Channel, and whale wisdom.

Below, I provide you with links which take you directly to the top holdings of various top funds I track as well as mutual fund giants, endowments and pensions. 

I want you to start using this information as a tool, not to mimic these funds blindly, but to understand how they invest and why. 

For example, I trade volatile biotech shares and one of my favorite biotech funds is Kevin Kotler's Broadfin Capital. The fund has roughly $1 billion of assets under management spread over 72 positions. You can view Broadfin's top holdings as of the end of June below (click on image):

You can click on the tabs at the top, in particular, click on the top fifth column on Change (%) twice to see where the fun increased their holdings (click below):

You can do this for every fund in the list below and if you know how to trade markets and are aware of funds adding positions to stocks that got clobbered, you can make excellent money using this information, especially if the beta wind is blowing in the right direction. 

In addition to this, I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

Do I use the information provided in 13F filings? Yes but I'm careful and want to see if top funds are adding or maintaining to positions that got whacked hard. I also use technical indicators and often buy dips of stocks when they get clobbered before this information becomes available, especially if I know it's a top holding of a top fund (like when Keryx Biopharmaceuticals recently got hit and fell from $7+ to $4, I used that dip to initiate a position knowing it's a top holding of Seth Klarman and David Abrams).

In these markets, don't chase stocks, you'll get burned, wait patiently and find the right opportunity to buy or add on dips, but again that is easier said than done and if you have no experience trading, scaling in and out of positions, you're better off diversifying your portfolio using stock and bond exchange-traded funds (ETFs).

Enjoy going through the holdings of top funds below but don't take this stuff too seriously, it's a dynamic market where things constantly change and even the best of the best managers find it tough making money in these schizoid markets.

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors

2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Highland Capital Management

11) Pentwater Capital Management

12) Och-Ziff Capital Management

13) Pine River Capital Capital Management

14) Carlson Capital Management

15) Magnetar Capital

16) Mount Kellett Capital Management 

17) Whitebox Advisors

18) QVT Financial 

19) Paloma Partners

20) Perry Capital

21) Visium Asset Management

22) Weiss Multi-Strategy Advisors

23) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest in bond and currency markets but the top macro funds are able to invest across all asset classes, including equities.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Caxton Associates (Bruce Kovner)

6) Tudor Investment Corporation

7) Tiger Management (Julian Robertson)

8) Moore Capital Management

9) Point72 Asset Management (Steve Cohen)

10) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to initiate their positions. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) Winton Capital Management

8) Graham Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

Top Deep Value, Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Schneider Capital Management

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) ValueAct Capital

36) Vulcan Value Partners

37) Okumus Fund Management

38) Eagle Capital Management

39) Sasco Capital

40) Lyrical Asset Management

41) Gabelli Funds

42) Brave Warrior Advisors

43) Matrix Asset Advisors

44) Jet Capital

45) Conatus Capital Management

46) Starboard Value

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well known funds.

1) Adage Capital Management

2) Appaloosa LP

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) JAT Capital Management

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Andor Capital Management

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Melvin Capital Partners

55) Owl Creek Asset Management

56) Portolan Capital Management

57) Proxima Capital Management

58) Tiger Global Management

59) Tourbillon Capital Partners

60) Impala Asset Management

61) Valinor Management

62) Viking Global Investors

63) Marshall Wace

64) York Capital Management

65) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Ghost Tree Capital

10) Sectoral Asset Management

11) Oracle Investment Management

12) Perceptive Advisors

13) Consonance Capital Management

14) Camber Capital Management

15) Redmile Group

16) RTW Investments

17) Bridger Capital Management

18) Southeastern Asset Management

19) Bridgeway Capital Management

20) Cohen & Steers

21) Cardinal Capital Management

22) Munder Capital Management

23) Diamondhill Capital Management 

24) Cortina Asset Management

25) Geneva Capital Management

26) Criterion Capital Management

27) Daruma Capital Management

28) 12 West Capital Management

29) RA Capital Management

30) Sarissa Capital Management

31) SIO Capital Management

32) Senzar Asset Management

33) Sphera Funds

34) Tang Capital Management

35) Thomson Horstmann & Bryant

36) Venbio Select Advisors

37) Ecor1 Capital

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase& Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason Capital Management

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Letko, Brosseau and Associates

2) Fiera Capital Corporation

3) West Face Capital

4) Hexavest

5) 1832 Asset Management

6) Jarislowsky, Fraser

7) Connor, Clark & Lunn Investment Management

8) TD Asset Management

9) CIBC Asset Management

10) Beutel, Goodman & Co

11) Greystone Managed Investments

12) Mackenzie Financial Corporation

13) Great West Life Assurance Co

14) Guardian Capital

15) Scotia Capital

16) AGF Investments

17) Montrusco Bolton

18) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I track activity of some pension funds, endowment funds and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, CNBC's Kate Kelly takes a look at how several big investors re-arranged their holdings last quarter in the latest 13F filings. Kelly also reported on the latest of 13F filings and Appaloosa Management founder David Tepper's guarded mindset on the markets.

Those of you who want to read my latest market thoughts should take the time to read my last comment on the stock rally everyone loves to hate.

Lastly, please remember to show your support for this blog by donating or contributing via PayPal at the top right-hand side. Thank you and be careful trading and investing, it's a real jungle out there!

U.S. state and local employee pension plans are in trouble — and much of it is because of flaws in the actuarial science used to manage their finances. Making it worse, standard actuarial practice masks the true extent of the problem by ignoring the best financial science — which shows the plans are even more underfunded than taxpayers and plan beneficiaries have been told.

The bad news is we are facing a gap of $6 trillion in benefits already earned and not yet paid for, several times more than the official tally.

Pension actuaries estimate the cost, accumulating liabilities and required funding for pension plans based on longevity and numerous other factors that will affect benefit payments owed decades into the future. But today’s actuarial model for calculating what a pension plan owes its current and future pensioners is ignoring the long-term market risk of investments (such as stocks, junk bonds, hedge funds and private equity). Rather, it counts “expected” (hoped for) returns on risky assets before they are earned and before their risk has been borne. Since market risk has a price — one that investors must pay to avoid and are paid to accept — failure to include it means official public pension liabilities and costs are understated.

The current approach calculates liabilities by discounting pension funds cash flows using expected returns on risky plan assets. But Finance 101 says that liability discounting should be based on the riskiness of the liabilities, not on the riskiness of the assets.

With pension promises intended to be paid in full, the science calls for discounting at default-free rates, such as those offered by Treasurys. Here’s the problem: 10-year and 30-year Treasurys now yield 1.5% and 2.25%, respectively. Pension funds on average assume a 7.5% return on their investments — and that’s not just for stocks. To do that, they have to take on a lot more risk — and risk falling short.

Much debate focuses on whether 7.5% is too optimistic and should be replaced by a lower estimate of returns on risky assets, such as 6%. This amounts to arguing about how accurate is the measuring stick. But financial economists widely agree that the riskiness of most public pension plans liabilities requires a different measuring stick, and that is default-free rates.

Ignoring this risk leaves about half of the liabilities and costs unrecognized. At June 30, 2015, aggregate liabilities were officially recognized at more than $5 trillion, funded by assets valued at almost $4 trillion and leaving $1 trillion — or more than 20% — unfunded. These are debts that must be paid by future taxpayers, or pensioners lose out. Taking into account benefits paid, passage of time and newly earned benefits, we estimate June 30, 2016 liabilities at $5.5 trillion and assets roughly unchanged at that same $4 trillion, indicating a $1.5 trillion updated shortfall.

Now let’s factor in both the cost of risk and low U.S. Treasury rates. We estimate the 2016 risk-adjusted liabilities nearly double to about $10 trillion, leaving unfunded liabilities of about $6 trillion, rather than $1.5 trillion.

Because today’s actuarial models assume expected returns and ignore the cost of risk, risk isn't avoided; indeed it is sought! By investing in riskier assets, pension plans’ models then enable them to claim they are better funded and keep required contributions from rising further.

Risky assets (like stocks) are of course expected to return more than default-free bonds. If that weren’t true, no investor would hold risky assets. But expected to return more doesn't mean will return more.

Risky assets might well earn less than default-free bonds, perhaps much less, even over the long term — that’s what makes them risky. And if that weren’t true, no investor would hold default-free bonds.

Compounding the problem, today’s aggregate annual contributions of $160 billion don’t even pay for newly earned benefits, adding more debt to be paid by future generations. State and local governments already face making bigger required contributions — even under the measurement approach that ignores risk — requiring higher taxes and crowding out other government spending. That is already happening in Chicago. In Detroit, Stockton, Calif., and Puerto Rico, bondholders haven't been paid.

Some actuaries argue it’s time to change this approach. This was spelled out in a recent paper written by several members of a pension finance task force jointly created by two industry groups 14 years ago. We are two of those authors.

The leadership of the American Academy of Actuaries, which speaks for its 18,500 members on public policy matters, rejected the paper. It also persuaded the Society of Actuaries, the other industry group, not to publish it. On Aug. 1, the presidents of the two organizations issued a joint letterdisbanding the task force and declaring that the authors couldn't publish the paper anywhere.

This is more than just an internal dispute. Today’s public plan actuaries serve their clients, who want lower liabilities and costs, even at the expense of future taxpayers and other stakeholders.

Plans are in trouble. Every year they are in deeper trouble. Many taxpayers are aware that state and local government pension plans are underfunded. They generally aren’t aware just how dire the situation is.

Good numbers don’t assure success, but bad numbers lead to bad decisions and may invite disaster.

Ed Bartholomew is a former banker and now is a consultant on pension financial management. You can follow him on Twitter @e_bartholomew. Jeremy Gold is a Fellow of the Society of Actuaries (and recent vice president and board member) and a member of the American Academy of Actuaries (and former vice chairman of the Pension Practice Council. Follow him on Twitter @jeremygold.

[...] while low returns are taking a toll on all pensions, especially US public pensions, the most pernicious factor driving pension deficits is record low or negative bond yields.

Importantly, at a time when pretty much all asset classes are fairly valued or over-valued, if another financial crisis hits and deflation sets in for a prolonged period, it will decimate all pensions.

To understand why, you need to understand what pensions are all about, namely, matching assets with liabilities. The liabilities most pensions have in their books go out 75+ years, while the investment life of most of the assets they invest in is much shorter (this is why pensions are increasingly focusing on infrastructure).

This means that a drop in rates will disproportionately impact pension deficits, especially when rates are at record lows because the duration of pension liabilities is much bigger than the duration of pension assets.

So even if stocks and corporate bonds are soaring, who cares, as long as rates keep declining, pension deficits will keep soaring. And if another financial crisis hits, watch out, both assets and liabilities will get hit, the perfect storm which will sink the pension Titanic.

"Here’s the problem: 10-year and 30-year Treasurys now yield 1.5% and 2.25%, respectively. Pension funds on average assume a 7.5% return on their investments — and that’s not just for stocks. To do that, they have to take on a lot more risk — and risk falling short."

The United Nations needs some financial peacekeepers. A dispute over whether new regulations governing the $54 billion UN Joint Staff Pension Fund will result in higher fees paid to outside bankers or modernize oversight of the 67-year-old trust has divided fund CEO Sergio Arvizu and union leaders, sparking accusations of mismanagement.

Lost in the fight is the fund’s performance: the account returned 5 percent the past decade, according to a June 30 report by Northern Trust Corp. That 10-year performance compares with 5.1 percent for the California Public Employees’ Retirement System, the largest in the U.S., and the 5.7 percent median for U.S. public pensions, according to Keith Brainard, who tracks pensions for the National Association of State Retirement Administrators.

Yet internal rules approved this month that shift authority over issues such as staffing and budgeting from Secretary-General Ban Ki-moon’s office to Arvizu have fueled the spat. At stake is a fund with more than 126,000 participants which pays about 71,000 retirees in 190 countries. Those payments go out in 15 currencies, including dollars, euros, kroners and rupees.

“We have arguably one of the most complex pension plan designs,” said Arvizu, a 55-year-old former director of investments at Mexico’s social security institute, via e-mail.

Divided Leadership

Adding to the complexity is the pension’s structure. Arvizu oversees benefits and operations and reports directly to the UN General Assembly, the main body representing all 193 member countries. The investment division is headed by Carolyn Boykin, a former president of Bolton Partners Investment Consulting Group. Boykin reports to Ban.

The fund’s broad investments are typical for a pension: it holds 61.3 percent of assets in stocks and 29 percent in fixed income, according to an internal report. It also has 6.9 percent in categories such as real estate, timberland and infrastructure and 2.7 percent in alternative investments, including private equity, commodities and hedge funds.

Moreover, the UN pension is 91 percent funded, above the 73.7 percent median for state pensions, Brainard said. If a plan can meet its projected payments, “it’s in good shape,” he said.

With backing from the UN General Assembly, Arvizu in 2014 began campaigning for changes he said were needed to modernize pension management at an institution famous for its Cold War-era bureaucracy. His argument: running an investment fund can’t be judged the same way you measure success for a humanitarian mission.

The union pushed back, seeing in the proposals the potential for managers to direct more investments to external institutions, undermining UN oversight and undercutting returns.

“This is a plan to move the pension fund outside the UN financial regulations,’’ said Ian Richards, president of the Coordinating Committee for International Staff Unions and Associations of the UN system, which has more than 60,000 members. “We don’t feel this management should get flexibility over how to manage the fund without all the checks and balances.’’

‘Outsourcing to Wall Street’

Allegations of mismanagement and conflicts of interests followed. On its website, the main UN union urged its members to “protect our pension fund: stop its exit from the UN at a time of outsourcing to Wall Street.”

In a letter to members last year, Arvizu said he was facing a “malicious campaign with gross misrepresentations.” The allegations triggered an internal investigation by the UN’s anti-corruption watchdog, which cleared Arvizu.

Fund officials reject the idea that they are planning to outsource management.

“There are no plans to privatize the pension fund, it’s not even an issue,’’ Lee Woodyear, the spokesman for the fund, said in a phone interview. “There are a lot of checks and balances in place and the new rules solidify what’s already taking place in practice.’’

Yet Arvizu, who joined the UN fund in 2006, argues he does need flexibility to hire and promote employees with specialized experience.

“The expertise to carry out this work -- including entitlements, risk management, plan design, asset liability management, and client services -- are different from other parts of the United Nations system,” he said.

Measuring Risk

The UN also needed to adopt modern tools for measuring risk and ensuring transparency, he said. Asset liability management studies, which help managers assess risk and strategy, “were not done before in the fund,” Arvizu said via e-mail.

Relations between management and the unions soured further when benefits management software installed in 2015 had delays enrolling beneficiaries. Thousands of new retirees, some of whom had to wait six months before receiving payments, were enraged.

“No doubt more could have been done with 20/20 hindsight to ensure that no new retiree was delayed,’’ said Woodyear. “There were delays, and the fund was slow to communicate clearly on the delays.’’

‘Compliance Risks’

Yet disputes keep flaring up. In July, the fund’s Asset and Liabilities Monitoring committee warned the pension was “exposed to significant governance, investment, operational and compliance risks.’’

According to an analysis by the UN union, the fund faces “significant concentration risks’’ from its two biggest portfolios, North American Equity and Global Fixed Income, which combined account for $30.5 billion. Two senior investment officers run these funds and vacancies in risk management have not been filled.

That’s now underway, Boykin said, hinting at the fund’s broader concerns about bringing capable professionals into the global body.

“The hiring process at the UN is lengthy,” she said.

Union leaders say they’ll keep pressing for the backlog of beneficiary payments to be fixed and on management to scale back the scope of the new regulations. But like other battles at the UN, little can happen quickly: the next fund review won’t take place until July 2017.

[...] the real problem is investment underperformance, YTD 190 basis points BELOW the policy benchmark followed by dismal performance in 2015.  The story I was told was that the recent attacks on the CEO (who doesn't manage the investment portfolio) were a diversionary tactic. The purpose was to distract the audience from the dismal investment returns since the current Representative of the Secretary-General (RSG), Carolyn Boykin arrived and put a stop to tactical asset allocation. The Chairman of the Investments Committee and the Director of Investments left shortly after Boykin's arrival, as did the Chief Risk Officer. Very ugly.

The "Closing Bell" appearance was a very sore subject within the Investment Management Division, (IMD) because the staff who worked on the Low Carbon Index project, which was completed BEFORE Boykin arrived at the UN, were not invited to the event. Boykin wanted to take full credit.

• Montreal is home of ICAO
• The city has world class universities, a diverse population and many fluently bilingual and multi-lingual finance and economics students with MBAs, Master's and PhDs.
• Two of the largest Canadian public pension funds, the Caisse and PSP, have their head offices here and there are great private sector pensions here too (CN, Air Canada, etc.). There are many experienced pension professionals who can manage assets internally at a fraction of the cost of what it costs the UN to farm assets to external managers, many of which are underperforming. Of course, this assumes the UN gets the governance right, allowing its pension fund to compensate ts staff properly.
• Moving to Montreal would not only cut costs, it would distance pension managers from the politics of the UN's General Assembly.
• Rents are much cheaper and it's a short plane ride away from New York City with no time difference.

The Ontario Teachers’ Pension Plan is seeking buyers for a minority stake in its $4 billion real-estate portfolio in Vancouver, including office towers and shopping malls, according to people familiar with the matter.

Cadillac Fairview, the real-estate unit of Canada’s third-biggest pension fund, is looking to raise about $2 billion from the sale, according to the people, who asked not to be identified. Cadillac Fairview has hired CBRE Group Inc. and Royal Bank of Canada for the sale, the people said. Spokespeople for Cadillac Fairview, CBRE, and RBC didn’t immediately respond to requests for comment or declined to comment.

Cadillac Fairview is the latest pension group seeking to reduce its holdings in the Vancouver commercial market, where prices have reached record highs amid an influx of foreign cash even as new supply drives up vacancy rates. Ivanhoe Cambridge and the Healthcare of Ontario Pension Plan are seeking about $800 million for their office towers in Burnaby, British Columbia, just outside of Vancouver.

The Cadillac Fairview portfolio, which hasn’t yet started marketing, includes 14 properties in downtown Vancouver and Richmond, with some of Canada’s largest shopping centers, office towers, and historic buildings up for grabs. The assets include a portfolio of waterfront properties including Waterfront Centre, a 21-story tower on the harbor built in 1990; the 238,000-square-foot PricewaterhouseCoopers Place; and The Station, a historic property built in 1912 that serves as North America’s largest transport hub, currently pending approval for an added office tower.

Some of the country’s biggest retail assets are also in the mix, such as the Pacific Centre, a downtown retailer with 1.6 million square feet for which Cadillac Fairview submitted a proposal this year to expand. It’s the third-most profitable shopping mall in Canada, according to brokerage Avison Young, with $1,599 in sales per square foot. The center also contains eight office towers of two million square feet, including 701 West Georgia and the HSBC building.

Asset Gains

The net asset value of Cadillac Fairview’s real estate holdings increased 13 per cent to $24.9 billion in 2015 over the prior year amid high demand for assets in North America, according to the latest financial report from the Toronto-based pension fund. It also lists six of the Vancouver properties as worth at least $150 million.

Demand for Vancouver offices has sent prices of properties to record highs in recent transactions, including Anbang Insurance Group Co.’s purchase of the Bentall Centre. The vacancy rate in the city rose to a 12-year high of 10.4 per cent as of June 30 as tenants absorbed 1 million square feet of new space since the same time last year, according to Avison Young. Buildings downtown, where most of Cadillac Fairview’s properties are located, are faring better, with vacancy tightening to 7.8 per cent from 9.8 per cent at the end of 2015.

Additional space is set to flood the market, with six office towers under construction for delivery as soon as this year totaling about 802,700 square feet, and 10 buildings proposed for the city, including Cadillac Fairview’s Waterfront Tower, according to Avison Young’s mid-year 2016 report. Despite the vacancy, rental rates for the best quality assets in Vancouver are the highest in Canada and some U.S. cities such as Chicago and L.A. at about $30 a square foot, Avison Young said.

The walls of Clarence Debelle’s Vancouver office on Canada’s west coast are lined with gifts from his real estate clients: jade and turtle dragon figurines; bottles of baijiu, a traditional Chinese alcohol; and enough special-edition Veuve Clicquot to fuel several high-end cocktail parties.

They are the product of Vancouver’s decade-long real estate frenzy. The city, with its stunning views of the mountains and yacht-dotted harbor, has long been one of the world’s most expensive places to live but price gains have reached a whole new level of intensity this year. Low interest rates, rising immigration, and a surge of foreign money—particularly from China—have all driven the increases.

Consider the latest milestones:

• The cost of a single-family home surged a record 39 percent to C$1.6 million ($1.2 million) in June from a year earlier.
• More than 90 percent of those homes are now worth more than C$1 million, up from 65 percent a year earlier, according to city assessment figures.
• Vancouver is now outpacing price gains in New York, San Francisco and London over the past decade.
• Foreigners pumped C$1 billion into the province’s real estate in a five-week period this summer, or about 8 percent of the province’s sales.

After copious warnings over the last six months, including from the Bank of Canada, that price gains are unsustainable, the provincial government of British Columbia moved last week. Foreign investors will have to pay an additional 15 percent in property-transfer tax as of Aug. 2 and city of Vancouver was given the authority to impose a new tax on empty homes.

As Canada waits to see what effect, if any, the moves may have, here are the stories from the city’s wild ride.

The past month has been an emotional roller coaster for Dallas police and firemen. Thursday afternoon, the bad news continued.

The Dallas Police and Fire Pension System is a billion dollars in the red, and the plan to bail the system out is already being called "unacceptable" by some.

The bailout plan, unveiled Thursday, is a proposal that police and fire employees knew was coming. But the fact is, the Dallas Police and Fire Pension System is actually closer to $2 billion in the hole.

If things keep going the way they are going, the pension fund will be broke by 2030. That's why consultants unveiled the bailout plan, which one police veteran called so drastic he believes it will be voted down by rank-and-file.

The plan calls for dramatic reductions in cost-of-living adjustments and deferred retirement option plans, also known as the drop program.

What's more, the City of Dallas would immediately have to contribute $600 million into the fund just to keep it solvent.

"There is no choice. There have to be deep cuts," said pension fund board member and Dallas City Council member Phillip Kingston. "We tried to make them the least painful as possible. There have to be deep cuts and there is no guarantee the city is going to love contributing the amount that being asked."

The pension fund got into trouble after former administrators made millions of dollars in risky real estate investments. Some of those administrators and advisors are reportedly now under federal investigation.

The pension system is in such bad shape pension system officials says dramatic cuts must be made beginning this October.

Jim Aulbaugh, a battalion chief for Dallas Fire-Rescue, is skeptical of any attempts to save his and his colleagues' pensions.

"I don't think it will make any difference," said Aulbaugh, a 33-year veteran. "It's a sinking ship that can't be saved."

But Dallas Police and Fire Pension Fund board members still believe they can salvage the system. And on Thursday, they unveiled a new plan built mostly on big cuts, new revenue and the hope that the city will pump new money into the fund.

Firefighters and cops, who are rallying for higher salaries at City Hall, understand that their retirements are in jeopardy. The pension system, set back by significantly overvalued real estate investments, is hurtling toward insolvency by 2030.

The fund has $3.27 billion in unfunded liabilities and less than $2.7 billion in assets -- a funding ratio of 45 percent. Pensions are generally thought to be in danger if their funding ratio is less than 80 percent. The fund would need its members and the city to double their contributions to meet its requirements.

Texas Pension Review Board Chairman Josh McGee said the fund is "in a world of hurt" and is unaware of a state pension system in worse shape.

"It's going to take shared sacrifice from all sides to actually fix the system," he said. "That's going to be difficult."

The proposals represented pension system officials' first concrete steps at comprehensive fixes.

Kelly Gottschalk, the system's executive director, said the fund's proposals would solve nearly two-thirds of the funding problem.

The most significant proposal is adding restrictions to the Deferred Retirement Option Program, better known as DROP. The program allows veteran officers and firefighters to "retire" in the eyes of the system, but continue working for their paychecks while their pension checks are sent to a separate investment fund. They pay a fee of 4 percent of their paychecks, less than the 8.5 percent contribution they'd make otherwise.

DROP gave recipients an 8 percent to 10 percent annual return even while the system earned significantly less. And actual retirees can keep their money in DROP indefinitely, accruing interest, and withdraw it whenever they want. That makes up $1 billion of the fund's money.

The proposal won't end that practice because the system needs the money. But it will tie it to Treasury bond yields.

That plan, if approved, will probably force cops and firefighters to either retire sooner or stay in the normal fund longer. Once in DROP, members could earn a 3 percent interest rate for seven years. Then, the money will earn nothing until they retire.

The plan will trim cost-of-living increases, base payments on a five-year highest-salary average rather than three years, and raise all members' contributions to 9 percent. DROP recipients will have their contributions refunded when they withdraw.

Members must approve the plan. So officials also restored reduced benefits for officers hired in the last few years in return for the cuts.

Officials hope the city will join them in a request to increase the contributions on both sides. That means millions more taxpayer dollars would be sunk into the fund. The city currently contributes the maximum allowed percentage, which will amount to roughly $118 million this fiscal year.

Jim McDade, president of the Dallas Fire Fighters Association, said he hopes members and the city will do what it takes. Benefits are important, he said. Dallas cops and firefighters don't pay into or receive Social Security.

"In the end, we have to save our pension," he said.

Police Lt. Ernest Sherman, a 26-year veteran, said he doesn't mind the proposed cuts.

"If the changes have to be made for the betterment of the pension, I'll be fine," he said.

But he said pension officials should have been more frank about the pension fund's troubles. He said the hopefulness sounded like all the other proposed fixes he has heard over the years.

And he fears that all the changes may not be enough. Gottschalk worries that the proposals will cause a run on the system by DROP members like Aulbaugh, the battalion chief, who said he's considering it.

Even if there is no run, the pension fund may even have a difficult time meeting its now-lower annual investment return target of 7.25 percent. And another economic downturn could hurt the system further.

"I don't know how you save a system like that except with steep cuts and big increases in contributions," said Steve Malanga, a senior fellow who studies pensions at the conservative research group Manhattan Institute. "Even so, the risk will remain very high for years to come."

The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure.  According the the National Real Estate Investor, DPFP was once applauded for it's "diverse investment portfolio" but turns out it may have all been a fraud as the pension's former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%.  Guess it's pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your "discretion". 

To provide a little background, per the Dallas Morning News, Richard Tettamant served as the DPFP's administrator for a couple of decades right up until he was forced out in June 2014.  Starting in 2005, Tettamant oversaw a plan to "diversify" the pension into "hard assets" and away from the "risky" stock market...because there's no risk if you don't have to mark your book every day.  By the time the "diversification" was complete, Tettamant had invested half of the DPFP's assets in, effectively, the housing bubble.  Investments included a $200mm luxury apartment building in Dallas, luxury Hawaiian homes, a tract of undeveloped land in the Arizona desert, Uruguayan timber, the American Idol production company and a resort in Napa. 

Despite huge exposure to bubbly 2005/2006 vintage real estate investments, DPFP assets "performed" remarkably well throughout the "great recession."  But as it turns out, Tettamant's "performance" was only as good as the illiquidity of his investments.  We guess returns are easier to come by when you invest your whole book in illiquid, private assets and have "discretion" over how they're valued.

In 2015, after Tettamant's ouster, $600mm of DPFP real estate assets were transferred to new managers away from the fund's prior real estate manager, CDK Realty Advisors.  Turns out the new managers were not "comfortable" with CDK's asset valuations and the mark downs started.  According to the Dallas Morning News, one such questionable real estate investment involved a piece of undeveloped land in the Arizona desert near Tucson which was purchased for $27mm in 2006 and subsequently sold in 2014 for $7.5mm.  Per the DPFP 2015 Annual Report:

In August 2014, the Board initiated a real estate portfolio reallocation process with goals of more broadly diversifying the investment manager base and adding third party fiduciary management of separate account and direct investment real estate assets where an investment manager was previously not in place. The reallocation process resulted in the transfer of approximately $600 million in DPFP real estate investments to four new investment managers during 2015. The newly appointed managers conducted detailed asset-level reviews of their takeover portfolios and reported their findings and strategic recommendations to the Board over the course of 2015 and into 2016. A significant portion of the real estate losses in 2015 were a direct result of the new managers’ evaluations of the assets.

Then the plot thickened when, in April 2016, according the Dallas Morning News, FBI raided the offices of the pension's former investment manager, CDK Realty Advisors.  There has been little disclosure on the reason for the FBI raid but one could speculate that it might have something to do with all the markdowns the pension was forced to take in 2015 on its real estate book.  At it's peak, CDK managed $750mm if assets for the DPFP.

With that background, it's not that difficult to believe that DPFP's actuary recently found the plan to be in serious trouble with a funding level of only 45.1%.  At that level the actuary figures DPFP will be completely insolvent within the next 15 years.  Plan actuaries estimate that in order to make the plan whole participants and/or the City of Dallas would need to contribute 73% of workers' total comp for the next 40 years into the plan...seems reasonable.

According to an article published by Bloomberg, a subcommittee of the pension's board recently submitted a proposal that would at least help prolong the life of the fund.  The subcommittee proposal calls for cost of living adjustments to be reduced from 4% to 2% while participants would be expected to increase their contributions to the plan.  Of course, taxpayers were asked to also provide "their fair share" equal to roughly $4mm in extra plan contributions per year, a request that would likely require the approval of the Texas legislature.  If approved, the proposal is anticipated to keep the plan solvent through 2046...at which point we assume they'll go back to taxpayers for more money?

A quick look at the plan's 2015 financial reports paints a pretty clear picture of the plan's issues.

Starting on the asset side of the balance sheet, and per our discussion above, DPFP was forced to mark down it's entire real estate book by 32% in 2015. Private Equity investments were also marked down over 20% (click on image). 

This came as over 50% of the assets were diverted into illiquid real estate and private equity investments back in 2006 (click on image).

But asset devaluations aren't the only problem plaguing the DPFP.  As we recently discussed at great length in a post entitled "Pension Duration Dilemma - Why Pension Funds Are Driving The Biggest Bond Bubble In History," another issue is DPFP's exposure to declining interest rates.  Per the table below, a 1% reduction in the rate used to discount future liabilities would result in the net funded position of the plan increasing by $1.7BN (click on image).

And of course the typical pension ponzi, whereby in order to stay afloat the plan is paying out $2.11 for every $1.00 it collects from members and the City of Dallas effectively borrowing from assets reserved to cover future liabilities (which are likely impaired) to cover current claims in full.  This "kick the can down the road" strategy typically ends badly for someone...like most public pension ponzis we suspect this one will be most detrimental to Dallas taxpayers. 

All of which leaves the DPFP massively underfunded...an "infinite" funding period seems like a really long time, right?

"[It's] a true ‘mess’ in the US pension world. I met one of their investment team a couple years ago and learned that their infrastructure allocation was being used to fund extremely risky managed lanes toll roads in Dallas. Speaks to importance of picking the right advisors and investments when making an illiquid allocation"

As of 2015, their infrastructure investments were as per below (click on image).

Notwithstanding allocating all your infrastructure allocation investments to one manager (JPM is good but 1 – too much manager concentration, 2 – maritime and Asian infra are high risk strategies that should only form a small part of a diversified infra/real asset program), their co-investments in LBJ Express and North Tarrant are in managed lanes.

Managed lanes utilize variable tolling, to optimize traffic flow. They are constructed next to the free alternative and will change their tolls on a frequent basis based on prevailing traffic conditions on the free alternative. For example, if there is an accident or it is during rush hour, these lanes will increase their tolls as more drivers want to use them.

As anyone in infrastructure knows, forecasting traffic for regular toll roads or airports is much more of an art than a science so you could surmise just how extremely difficult it is to forecast and manage these types of managed lane investments. Definitely not for beginners or inexperienced US plans such as Dallas Police.

http://www.bloomberg.com/news/articles/2015-09-17/drivers-decry-rise-of-toll-lanes-as-texas-s-lbj-expressway-opens

Given what the article above mentions regarding Dallas’ real estate investments, I am not surprised. Scary to think about though and by the time it gets back to the Police, they are the losers and it is not fair. See the attachment on them selling their stakes in these investments, probably at the worst possible time.

If you would like to quote, please keep anonymous. When I read about this though it reinforces if US plans think they are going to make wise illiquid infrastructure investment decisions without someone experienced on their side or in house, they will prove disappointed. And the traditional GPs are definitely not fully on their side.