When it comes to at least one type of investing, U.S. pension funds should take a (maple) leaf out of their Canadian counterparts' playbook.

Despite being among the largest private equity investors, U.S. pension funds such as the California Public Employees' Retirement System and the California State Teachers' Retirement System have been slow to transition from a hands-off approach to one that involves actively participating in select deals, a feature known in the industry as direct investing.

A More Direct Approach

The benefits of direct investing are lower (or sometimes no) fees and the potential to enhance returns, and that makes it an attractive proposition. But so far, U.S. pension funds have been pretty content as passive investors for the most part, writing checks in exchange for indirect ownership of a roster of companies but without outsize exposure to any (click on image).

State of the States

State pension funds are comfortable writing checks to private equity firms but could bolster their returns by investing directly in some of those firms' deals (click on image).

Not so Canadian funds. A quick glance at the list of the private equity investors -- commonly referred to as limited partners -- that have been either participating in deals alongside funds managed by firms such as KKR & Co. or doing deals on their own since 2006 shows that these funds have had a resounding head start over those in the U.S.

Notably Absent

Large U.S. pension funds are nowhere to be seen among private equity fund investors that participate directly in deals, a strategy used to amplify their returns (click on image).

Canadian funds' willingness to pursue direct investing is driven in part by tax considerations: they can avoid most U.S. levies thanks to a tax treaty between the two North American nations, while they are exempt from taxes in their own homeland. But U.S. pensions would still benefit from better returns, so it's curious that they haven't been more active in this area.

There's plenty of opportunity for direct investing. Private equity firms are generally willing to let their most sophisticated investors bet on specific deals in order to solidify the relationship (which can hasten the raising of future funds). It also gives them access to additional capital.

Rattling the Can

Private equity firms recognize that offering fund investors the right to participate directly in their deals bolsters their general fundraising efforts (click on image),

The latter point has been a crucial ingredient that has enabled larger transactions and filled the gap caused by the death of the so-called "club" deals (those involving a team of private equity firms) since the crisis.

Seal the Deal

U.S. private equity deals which are partly funded by direct investments from so-called limited partners reached their highest combined total since 2007 (click on image).

There are some added complications. Because some of the deals involve heated auction processes, limited partners must do their own diligence and deliver a verdict fairly quickly. That could prove tricky for U.S. pension funds, which would need to hire a handful of qualified executives and may find it tough to match the compensation offered elsewhere in the industry. Still, the potential for greater investment gains may make it worth the effort -- even for funds like Calpers that are reportedly considering lowering their overall return targets.

With 2017 around the corner, one of the resolutions of chief investment officers at U.S. pension funds should be to evolve their approach to private equity investing. They've got retired teachers, public servants and other beneficiaries to think about.

In Canada, there is a big push by pensions to go direct in private equity, foregoing funds altogether. Dasha Afanasieva of Reuters reports, Canada’s OMERS private equity arm makes first European sale:

Ontario’s municipal workers pension fund has sold a majority stake in marine-services company V.Group to buyout firm Advent International in the first sale by the Canadian fund’s private equity arm in Europe.

Pension funds and other institutional investors are a growing force in direct private investment as they seek to bypass investing in traditional buyout funds and boost returns against a backdrop of low global interest rates.

As part of the shift to more direct investment, the Ontario Municipal Employees Retirement System (OMERS) set up a private equity team (OPE) and now has about $10-billion invested.

It started a London operation in 2009 and two years later it bought V.Group, which manages more than 1,000 vessels and employs more than 3,000 people, from Exponent Private Equity for an enterprise value of $520-million (U.S.).

Mark Redman, global head of private equity at OMERS Private Markets, said the V.Group sale was its fourth successful exit worldwide this year and vindicated the fund’s strategy. He said no more private equity sales were in the works for now.

“I am delighted that we have demonstrated ultimate proof of concept with this exit and am confident the global team shall continue to generate the long-term, stable returns necessary to meet the OMERS pension promise,” he said.

OMERS, which has about $80-billion (Canadian) of assets under management, still allocates some $2-billion Canadian dollars through private equity funds, but OPE expects this to decline further as it focuses more on direct investments.

OPE declined to disclose how much Advent paid for 51 per cent of V.Group. OPE will remain a minority investor.

OPE targets investments in companies with enterprise values of $200-million to $1.5-billion with a geographical focus is on Canada, the United States and Europe, with a particular emphasis on Britain.

As pension funds increasingly focus on direct private investments, traditional private equity houses are in turn setting up funds which hold onto companies for longer and target potentially lower returns.

Bankers say this broad trend in the private equity industry has led to higher valuations as the fundraising pool has grown bigger than ever.

Advent has a $13-billion (U.S.) fund for equity investments outside Latin America of between $100-million and $1-billion.

The sale announced on Monday followed bolt on acquisitions of Bibby Ship Management and Selandia Ship Management Group by V.Group.

Goldman Sachs acted as financial advisers to the shipping services company; Weil acted as legal counsel and EY as financial diligence advisers.

Now, a couple of comments. While I welcome OPE's success in going direct, OMERS still needs to invest in private equity funds. And some of Canada's largest pensions, like CPPIB, will never go direct in private equity because they don't feel like they can compete with top funds in this space (they will invest and co-invest with top PE funds but never go purely direct on their own).

[Note: It might help if OPE reports the IRR of their direct operations, net of all expenses relative to the IRR of their fund investments, net of all fees so their stakeholders can understand the pros and cons of going direct in private equity. Here you need to look at a long period.]

There is a lot of misinformation when it comes to Canadian pensions 'going direct' in private equity. Yes, they have a much longer investment horizon than traditional funds which is a competitive advantage, but PE funds are adapting and going longer too and in the end, it will be very hard, if not impossible, for any Canadian pension to compete with top PE funds.

I am not saying there aren't qualified people doing wonderful work investing directly in PE at Canada's large pensions, but the fact is it will be hard for them to match the performance of top PE funds, even after fees and expenses are taken into account.

Who knows, maybe OPE will prove me wrong, but this is a tough environment for private equity and I'm not sure going direct in this asset class is a wise long-term strategy (unlike infrastructure, where most of Canada's large pensions are investing directly).

As the year comes to a close, it is time to review how the macro consensus forecasts for 2016 that were made a year ago fared. Each December, I compile consensus economic and financial market forecasts for the year ahead. When the year comes to a close, I take a look back at the prognostications and compare them with what we know actually occurred. I do this because markets generally do a good job of pricing in consensus views, but then move -- sometimes dramatically -- when the consensus is surprised and a different outcome transpires. When we look back, with 20/20 hindsight, we can see what the surprises were and interpret the market movements the surprises generated.

Of course, the biggest forecast misses of 2016 were not in the economic indicators and financial markets, but in the political arena. The consensus views of political pollsters were that Brits would vote to remain in the European Union and that Hilary Clinton would win the US Presidential election. Instead, the actual outcomes were Brexit and President-elect Donald Trump. These political misses have had and will continue to have significant economic and financial market consequences. In the context of these political surprises, it's not only interesting to look back at the notable global macro misses and the biggest forecast errors of the past year, it also helps us to understand 2016 investment returns.

Real GDP

Since the Great Financial Crisis, forecasters have tended to be over-optimistic in their real GDP forecasts. That was true again in 2016. Average real GDP growth for the twelve countries we monitor is now expected to be 3.0% compared with a consensus forecast of 3.5%. In the twelve economies, real GDP growth fell short of forecasters' expectations in eleven and exceeded expectations in just one. The weighted mean absolute forecast error for 2016 was 0.51 percentage points, down a bit from the 2015 error, but still sizeable relative to the actual growth rate (click on image).

Based on current estimates, 2016 real GDP growth for the US fell short of the December 2015 consensus by 0.8 percentage points, a bigger downside miss than in 2015 (-0.5) or 2014 (-0.1). The biggest downside misses for 2016 were for Russia (-1.6 pct pts), Brazil (-1.4), India (-1.1) and Mexico (-0.8). China's real GDP beat forecasts by 0.1. Canadian forecasters missed by -0.5 pct pts, a little less than the average miss. On balance, it was a sixth consecutive year of global growth trailing expectations.

CPI Inflation

Inflation forecasts for 2016 were also, once again, too high. Average inflation for the twelve countries is now expected to be 2.2% compared with a consensus forecast of 2.6%. Nine of the twelve economies are on track for lower inflation than forecast, while inflation was higher than expected in three countries. The weighted mean absolute forecast error for 2016 for the 12 countries was 0.33 percentage points, a much lower average miss than in the previous two years.

The biggest downside misses on inflation were in Russia (-0.9 pct pts), India (-0.7), Australia (-0.7), and Korea (-0.6). The biggest upside miss on inflation was in China (+0.5). UK and US inflation were also slightly higher than forecast (click on image).

Policy Rates

Economists' forecasts of central bank policy rates for the end of 2016 once again anticipated too much tightening by developed market (DM) central banks, but for emerging market (EM) central banks, it was a more mixed picture (click on image).

In the DM, the Fed failed to tighten as much as forecasters expected. The biggest DM policy rate miss was in the UK, where the Bank of England had been expected to tighten, but instead cut the policy rate after the Brexit vote. The ECB, the Bank of Japan, the Reserve Bank of Australia and the Bank of Canada also unexpectedly cut their policy rates. In the EM, the picture was more mixed. In China, where inflation was higher than expected, the PBoC did not deliver expected easing. In Brazil and India, where inflation fell more than expected, the central banks eased more than expected. In Russia where inflation also fell, Russia's central bank eased less than expected. In Mexico, where the central bank was expected to tighten, the tightening was much greater than expected after the Trump election victory caused the Mexican Peso to fall sharply.

10-year Bond Yields

In nine of the twelve economies, 10-year bond yield forecasts made one year ago were too high. Weaker than expected growth and inflation combined with major central banks’ decisions to delay tightening or to ease further pulled 10-year yields down in most countries compared with forecasts of rising yields made a year ago (click on image).

In five of the six DM economies that we track, 10-year bond yields surprised strategists to the downside. The weighted average DM forecast error was -0.33 percentage points. The biggest misses were in the UK (-0.88 pct. pt.), Eurozone (proxied by Germany, -0.49), Japan (-0.39), and Canada (-0.34). In the EM, bond yields were lower than forecast where inflation fell more than expected, in India and Russia. The biggest miss in the bond market was in Brazil, where inflation fell much more than expected and reduced political uncertainty saw the 10-year bond yield almost 4 percentage points lower than forecast. Bond yields were higher than expected in China, where inflation was higher than expected, and much higher than expected in Mexico where political risk increased with Trump's election.

Exchange Rates

Currency moves against the US dollar were quite mixed in 2016. The weighted mean absolute forecast error for the 11 currencies versus the USD was 5.4% versus the forecast made a year ago, a smaller error than in the previous two years (click on image).

The USD was expected to strengthen because many forecasters believed the Fed would tighten two or three times in 2016. Once again the Fed found various reasons to delay, with only one tightening occurring on December 14. If everything else had been as expected, the Fed's delay would have tended to weaken the USD. But everything else was not as expected. Most other DM central banks eased policy by more than expected and the ECB and the BoJ implemented negative policy rates. In addition, oil and other commodity prices rallied causing commodity currencies like RUB, AUD, and CAD to strengthen more than forecast.

The biggest FX forecast misses were casualties of the big political consensus misses on Brexit and the US presidential election. The GBP was almost 18 percent weaker than forecast a year ago, while the MXN was 17% weaker than forecast after President-elect Trump promised to “tear up” NAFTA. The biggest miss on the upside was for BRL (+27%) where President Dilma Rousseff’s impeachment received a standing ovation from the currency market.

North American Stock Markets

A year ago, equity strategists were optimistic that North American stock markets would turn in a decent, if unspectacular, performance in 2016. However, despite a year characterized by weaker-than-expected real GDP growth and inflation and by political surprises that were widely-perceived as negative, North American equity performance exceeded expectations by a substantial margin. I could only compile consensus equity market forecasts for the US and Canada. News outlets gather such year-end forecasts from high profile US strategists and Canadian bank-owned dealers. As shown below, those forecasts called for 2016 gains of 5.5% for the S&P500 and 10.0% for the S&PTSX Composite (click on image).

As of December 14, 2016, the S&P500, was up 13.6% year-to-date (not including dividends) for an error of +8.1 percentage points. The S&PTSX300, rebounding from a sizeable decline in 2015, was up 17.1% for an error of +7.1 percentage points.

Globally, actual stock market performance was less impressive than that of North American markets, with two notable exceptions, Russia and Brazil (click on image).

Stocks performed poorly the Eurozone and Japan, where deflation worries caused central banks to adopt negative interest rates. China saw the biggest equity loss (-11.3%) of the markets we monitor as slowing growth and fears of currency devaluation fueled large capital outflows. In the US, where the Fed delayed monetary policy tightening, and in the UK, where the BoE unexpectedly eased, equities posted solid gains. In Canada, and Australia, where central banks eased more than expected, equities were also boosted by a recovery in commodity prices. Russia and Brazil posted huge equity market gains, rebounding from large currency and equity market declines in 2015.

Investment Implications

While the 2016 global macro forecast misses were similar in direction, they were generally smaller in magnitude relative to those of 2015 and the investment implications were different. Global nominal GDP growth was once again weaker than expected, reflecting downside forecast errors on both real GDP growth and inflation. In 2016, most central banks either tightened less than expected or eased more than expected, but continued political uncertainty, weaker than expected nominal GDP growth and the strong US dollar held the US equity market in check through early November prior to the US election.

Although many strategists argued that a Trump victory would be bad for US equities, because of uncertainty over his policies in general and his protectionist views in particular, the opposite reaction followed the election. US equities outperformed by a wide margin. US small caps and financials led the gains on Trump’s promise of reduced regulation, corporate tax reform and a steeper yield curve. UK equities rallied in the aftermath of Brexit, boosted by the increased competitiveness generated by the sharp depreciation of the GBP. In Japan and the Eurozone, where governments failed to enact structural reforms and where central banks experimented with negative policy interest rates, equities badly underperformed. In Canada, Australia, Brazil, Mexico and Russia, rebounding commodity prices supported equity markets. In China, one of the few countries where reported nominal GDP growth was stronger than expected (despite on-the-ground reports of economic slowdown), equity prices fell as capital fled the country.

Similar to the previous two years, downside misses on growth and inflation and central bank ease in most countries provided solid, positive returns on DM government bonds in the first 10 months of 2016. However, after the Trump election victory, as markets priced in stronger US growth and inflation and bigger US budget deficits, government bonds across the globe gave back much of their gains and significantly underperformed equities in all regions.

Smaller divergences in growth, inflation and central bank responses, along with firming crude oil and other commodity prices, led to smaller currency forecast errors. For Canadian investors, the stronger than expected 5% appreciation of CAD against the USD meant that returns on investments in both equities and government bonds denominated in US dollars were reduced if the USD currency exposure was left unhedged. The biggest losers for Canadian investors were Eurozone and Chinese equities, as well as most DM sovereign bonds, especially if unhedged.

As 2017 economic and financial market forecasts are rolled out, it is worth reflecting that such forecasts form a very uncertain basis for year-ahead investment strategies. The high hopes (and fears) that markets are currently pricing in for a Trump presidency will surely be recalibrated against actual policy changes and foreign governments’ policy reactions.

The lengthy period in recent years of outperformance by portfolios for Canadian investors that are globally diversified, risk-balanced and currency unhedged may have run its course. Global asset performance may be shifting toward a more US-centric growth profile that could also benefit Canada if Trump’s protectionist tendencies are implemented only against China, Mexico and any other countries a Trump-led America deems to unfair traders. While such an outcome is possible, 2017 will undoubtedly once again see some large consensus forecast misses, as new surprises arise. As an era of rising asset values supercharged by ever-easier unconventional monetary policies seems to be coming to an end, the scope for new surprises to cause dramatic market moves has perhaps never been higher.

Texan hedge fund manager J. Kyle Bass, the founder of Hayman Capital, says that global markets are at the “beginning of a tectonic shift.”

“Today, global markets are at the beginning of a tectonic shift from deflationary expectations to reflationary expectations. What happens to economies at maximum leverage when interest rates begin to rise? Reconciling the potent strengths of the world’s largest economies with their inherent weaknesses has revealed various investable anomalies. The enormity of the apparent disequilibrium is breathtaking, making today a tremendous time to invest,” Bass wrote in a year-end letter to investors seen by Yahoo Finance.

He added: “One opportunity in particular has the greatest risk-reward profile we have ever encountered in our decade of being a fiduciary.”

He didn’t provide specifics about the opportunity in the letter.

On Tuesday, Hayman launched its third Asia-focused fund, which is “designed to provide investors with nuanced access to perhaps one of the largest imbalances in financial markets history.”

The first Asia-focused fund was the Japan Macro Opportunities Fund, which returned capital to investors after the Japanese yen depreciated 40% from 2012 to 2015. The second Asia-focused fund was the Hayman China Opportunities Fund, which launched in July.

Bass had a knockout 2016, with Hayman Capital’s Master Fund finishing the year with an estimated net-performance of 24.83%, according to the letter. This compares to the S&P 500, which was up a modest 9%.

Meanwhile, the average macro hedge fund returned 0.28% through the end of November, according to HFR. Since Hayman’s inception in 2006, the fund has returned 436.75% and an annualized return of 16.7%.

2016 got off to a rough start for many investors. At the time, Bass returned to his core competency — global macro investing. In the letter, he noted that he expects the next few years to be the best years for macro since the late 1990s.

“We reorganized our portfolio to invest in the macro themes that began to reveal themselves early in the year. Exploiting our reflationary view, we invested in global interest rate markets, currencies, and commodities across the world,” he wrote in the letter.

A number of macro fund managers have voiced concerns about central banks distorting markets with extraordinary monetary policy. This had made macro investing particularly challenging.

“Over the past several years, economic gravity has been pulling one way and central banks have been using aggressive monetary policy to pull the other. Investing in macro, while this phenomenon has existed, has been difficult to say the least,” Bass wrote, adding, “From here-on, we expect to encounter significant changes in global fiscal policies along with a continuation of the upward movement of general price levels for consumers and producers alike.”

Bass has been making a huge bet against China’s “recklessly built” banking system. Back in February, Bass unveiled his case in an investor letter entitled “The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance.”

Bass, who gained notoriety for correctly betting against the US subprime crisis, wrote at the time that similar to the US banking system, China’s banking system has “increasingly pursued excess leverage, regulatory arbitrage, and irresponsible risk taking.” He believes that the Chinese banking system losses will be gargantuan.

"You have wages up, you have real estate rent moving up, now you have commodities bouncing. So 2017 is going to be a year of increasing inflation but economic growth lagging," Bass said during an interview on CNBC's "Power Lunch.""We're moving into a stagflationary environment in my view."

From an investment standpoint, the Hayman Capital Management founder and CIO said the main advice is for investors to stay away from long-duration bonds. Inflation usually causes bond yields to rise and prices to fall, creating capital losses for investors.

With 546 trillion won ($456.5 billion) in assets, South Korea’s public National Pension Service is the world’s third-largest pension fund, behind Japan’s and Norway’s. It’s also become a part of the widening scandal surrounding impeached President Park Geun-hye.

On Dec. 31, a Seoul court issued a warrant for the arrest of Moon Hyung-pyo, chairman of the NPS. He was suspected of having pressured the fund, when he was a government minister, to support the controversial merger of two Samsung Group-affiliated companies. Moon’s lawyer said the chairman denied the allegations, according to reports in Korean media. Authorities also want to know whether Samsung made donations to benefit a confidante of the president in exchange for help getting NPS support. Jay Y. Lee, Samsung’s heir apparent and de facto leader, was summoned to be questioned as a suspect on Jan. 12. Both Samsung and Lee have denied wrongdoing. The NPS has said it supported the deal based on investment considerations.

Established in 1988, the NPS is Korea’s main public retirement plan and a major investor in the country’s blue-chip companies, owning 9 percent of Samsung Electronics, 8 percent of Hyundai Motor, 10.3 percent of LG Display, and large stakes in other prominent companies. Its potential influence as a shareholder makes it a natural target for pressure from politicians seeking favors from the corporations in its portfolio. The scandal has “created huge risks to the integrity and legitimacy of the NPS,” says Katharine Moon, a political science professor at Wellesley College.

As the fallout from Park’s impeachment spreads, some lawmakers are looking into reforming the pension service. The alleged use of the fund’s investment clout to advance politicians’ agendas “can bring doubts on Korea’s capital markets overall,” says Chae Yibai, a National Assembly member from the opposition People’s Party. “We need to discuss the matter of the independence of the investment management unit from the control of the government, like overseas pension funds,” he says.

Despite its size, the NPS often takes a passive approach in its relations with the chaebol, the family-run conglomerates that dominate Korea’s economy and have close ties with local politicians, says Woojin Kim, an associate professor of finance at Seoul National University. The fund’s management structure contributes to its low-key approach. The NPS has three decision-making bodies to provide public input into investment decisions, but “none of them is formed of members with knowledge of asset management or pension funds,” says Kim Sang-Jo, a professor of international trade at Hansung University in Seoul. Instead, officials from business lobbies, labor unions, and civic groups dominate the committees, and “they have little power or interest in decision-making on important issues at NPS,” says Kim.

The NPS has occasionally taken a more active role, particularly when the government has the lead on an issue. In early 2016 the fund announced plans to blacklist companies that didn’t follow Park’s directive to raise their dividend payouts, part of her effort to get chaebol to reduce their cash hoards and return money to shareholders through dividends or to workers via wage increases.

The NPS has recently felt some pain from a government-dictated relocation of its headquarters to Jeonju, a sleepy provincial capital about 125 miles south of Seoul. During her campaign for president in 2012, Park pledged to help redevelop the southwestern city. More than 30 fund managers, including about 20 in charge of overseas investment, have left the fund rather than relocate, according to the NPS.

By focusing public attention on the tangled relationships among the government, the fund, and business, the turmoil may ultimately help the NPS achieve one stated goal: to invest more outside Korea. “The Korean stock market is going to be too small for them,” says Michael Na, a Korea strategist with Nomura. “More and more of the money will go overseas.” Foreign investments account for less than 150 trillion won, about 27 percent of its total assets, but the NPS wants to expand its foreign portfolio to more than 300 trillion won by 2021. This year it plans to increase international holdings by about 25 trillion won, of which 10 trillion will go to alternative investments such as private equity or bank loans. The NPS in July picked BlackRock and Grosvenor Capital Management to manage as much as $1 billion in hedge fund investments. As for local stocks, the fund “will cautiously approach investing in domestic markets for this year,” spokeswoman Chi Young Hye says.

Moving beyond Korean equities wouldn’t only reduce the risk of political meddling but would also potentially improve investment performance, says Moon of Wellesley. That will be essential as NPS fund managers face the task of supporting Korea’s aging population. “They know the math,” she says. “There will have to be a push to diversify and decrease the overinvesting in a small number of companies.”

The bottom line: Korea’s public retirement plan is a major shareholder in the country’s most important companies, and its chairman has been arrested.

At least three of the quant strategies used by BlackRock’s global hedge fund platform have suffered losses greater than 10 percent in the year through November, according to the client update, a copy of which was seen by Bloomberg. That compares with an average return of 3.6 percent for quant funds, Hedge Fund Research Inc.’s directional quant index shows.

The debate over what yield on the 10Y spells the end of the 30 year bond bull market, and would spillover into selling among other asset classes, is heating up.

Earlier this week, in his monthly annual letter Bill Gross wrote that 2.6% is the only level for the market that matters: "This is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017."

Later that day, during his webcast with investors, Doubleline's Jeff Gundlach slammed Gross as a "second tier bond manager" for his "forecast", and countered that 3.0% is the magic number: “the last line in the sand is 3 percent on the 10-year. That will define the end of the bond bull market from a classic-chart perspective, not 2.60%” as Gross suggested. He then added that “almost for sure we’re going to take a look at 3 percent on the 10-year during 2017, and if we take out 3 percent in 2017, it’s bye-bye bond bull market. Rest in peace.”

Today, a third bond manager joined the frey when Guggenheim's Scott Minerd sided with Gundlach and said that 10-year yields could end their long-term trend if they rise above 3%.

“It’s basically the beginning of the end,” Minerd told Bloomberg Television. “Long-term trends like this don’t reverse quickly,” he added, saying yields might spend several building a new base before taking off."

Minerd also said the Federal Reserve risks falling “behind the curve” on the U.S. economy and needs to raise interest rates in March, a step that markets see as far from certain. Futures trading implies a roughly 30 percent chance, according to data compiled by Bloomberg. The fund manager also said that while stock markets may be volatile as President-elect Donald Trump takes office, his policies ultimately can provide a “potent mix” for economic growth. The S&P 500 Index, now at 2270, is likely to end the year in the 2450-2500 neighborhood, according to Minerd.

However, he cautioned that markets continue to disagree with the Fed's dot plot signaling where rates are headed, which makes “the market is vulnerable to a tantrum."

Also, he said that "as the business cycle ages, in 2019, 2020 when we could anticipate we might have another recession, that there will be another deflationary burst that will bring rates back down if we do get above 3%, but we haven't violated that trend yet."

We have little to add to this pissing contest about whose prediction about the number that marks the end of the bond bull market will be right, suffice it to say that it truly is a bizarro world when some of the smartest bond managers are arguing over some squiggles on a chart.

Apax Partners has sold half its 96% stake in GlobalLogic, an IT outsourcing firm founded by four IT Titans, to Canada’s CPP Investment Board.

The financial terms weren’t disclosed, but people in the know said the transaction valued the digital products development company at $1.5 billion (Rs 10,235 crore). That means a big payday for Apax, as the private equity firm will end up making more than three times money on a four-year-old investment.

Apax acquired GlobalLogic in 2013 for $420 million from a clutch of financial investors, including a PE fund managed by Goldman Sachs, Westbridge, New Atlantic Ventures and Sequoia. It will continue to own 48% of the US-based firm, with the management team holding the rest, the people said. Both CPPIB and Apax will become co owners of the company.

The transaction would be one of the biggest private equity exits in the technology sector post Capgemini’s $4 billion acquisition of Nadasdaq-listed iGate, which was also backed by Apax Partners.

Ryan Selwood, managing director and head of direct private equity at CPPIB, called it a “compelling opportunity” for the Canadian pension fund. “GlobalLogic’s market-leading position, exceptional track record and deep customer relationships will enable it to continue capitalising on technology megatrends,” he said.

“GlobalLogic has seen significant returns from early investments in customer focus and in building differentiated capabilities to drive digital transformation for a number of large customers,” said Rohan Haldea, partner at Apax Partners.

Founded by Rajul Garg, Sanjay Singh, Manoj Agarwala and Tarun Upadhyay, San Jose, California-based GlobalLogic has its core operations in India. The company was initially founded as Induslogic in 2000, with headquarters in Vienna, Virginia and had a delivery centre in Noida.

It provides product development services, including experience design, product engineering, content engineering, and labs. It specializes in big data and analytics, cloud, design, DevOps, embedded, Internet of Things, mobile, and security practices.

“In the past three years with Apax, we’ve enjoyed a 20%+ compound annual growth rate, consistently outperforming the broader product engineering services market,” said GlobalLogic Chief Executive Shashank Samant.

GlobalLogic is one of the larger players in the outsourced engineering research and development industry. The company is forecast to post around $450 million in fiscal 2017 revenue, with a 20% operating margin. It has more than 11,000 employees and delivery centres, called ToyFactories, in India, the US, Eastern Europe and Argentina.

Engineering R&D services have been growing faster than regular IT services, though over a smaller base. The sector has seen some consolidation, with over 15 niche players having been acquired over the last two years.

GlobalLogic was also looking at potential acquisitions, and could consider at bolting niche consulting firms in the future. India’s technology sector has matured and has more challenges to face, but analysts believe growth can still be achieved with the right business mix and people.

“Despite having a cautious outlook on growth/margins and the overall Indian IT space currently, we still maintain our view that if the business mix is right, the proposition is right and execution is right — the IT services industry still has growth left,” Nomura Securities analysts Ashwin Mehta and Rishit Parikh wrote in a note in September.

Apax, which started investing in India 10 years ago, has invested $1.5 billion across half a dozen companies, but has already returned $2.3 billion cash to its investors, even though it has yet to exit some of its portfolio companies. The performance makes it one of the most successful global private equity funds in India. The UK-based investment firm, which manages $20 billion globally, has invested predominantly in the technology space. Apax backed iGate to acquire India’s Patni Computer Systems in 2011 for roughly $1 billion and sold it off to Capegemini four years, making a nearly fourfold return.

It also made bets in the healthcare and financial services space in the country. It acquired an 11% stake in Apollo Hospitals in 2007 for $100 million, which it sold off in 2013 making a 3.5-time return. The PE fund has a Rs 500 crore exposure to the Murugappa Group’s Cholamandalam Investment & Finance Co.

Ontario Teachers’ Pension Plan first began to lead the Canadian pension funds’ shift from sleepy, passive investors to globe-trotting deal makers 25 years ago.

What Teachers started in 1991 with a few million dollars and its first direct private equity investment has grown into a multibillion-dollar private-capital group active around the world. Others have followed, with new funds specializing in buyouts and turnarounds emerging and more institutional investors seeking to boost their exposure to alternative investments.

Now wrapping up a landmark year, Teachers Private Capital is giving more thought to selling some investments into the hot market.

“We’ve probably been more focused on taking advantage of where prices are today and lightening up on some of our holdings than we have been on adding new companies to our portfolio,” says Jane Rowe, head of Teachers Private Capital division, from headquarters perched in northern Toronto.

Ms. Rowe is taking stock of a private-equity portfolio representing 16 per cent of Teachers’ total assets – $28.4-billion as of the end of 2015, the most recent figure available. When the Ontario Teachers’ Pension Plan was made independent in 1990, it was just a pile of non-marketable Province of Ontario debentures. Over time, Teachers Private Capital bought up a quirky range of international businesses such as a British lottery, seniors’ housing facilities, mattress companies and snack foods. In its next act, Ms. Rowe says Teachers Private Capital will further refine how it sets itself apart from – and partners with – its global competitiors.

It has been a profitable run for the country’s largest single-profession pension plan. After factoring in asset management, internal and carried interest costs, the group has generated a 20.2-per-cent internal rate of return for the schoolteachers of Ontario since its inception.

Over time, Teachers Private Capital has sent less money to private-equity firms to invest on its behalf, building a team that can do more direct investments that now make up about three-quarters of its holdings. In many cases, the private equity funds that it does invest in have also become co-investment partners on other deals.

There were some hard lessons along the way. A massive $35-billion leveraged buyout bid for Bell Canada Enterprises (now BCE Inc.) that Teachers led in 2007 might have been the world’s largest at the time, but instead fizzled out 18 months later. And the group’s very first private-equity investment of a 25-per-cent stake in the White Rose Crafts and Nursery Sales Ltd. store chain was a major bust.

“We lost all our money within six months – that’s the folklore,” says Ms. Rowe of that investment. “But shortly thereafter – about two years later – we did our investment into Maple Leaf Sports & Entertainment. And that’s one we held for 17 years,” she says. Teachers’ sold its stake to Canadian telecom giants in 2012 for $1.32-billion.

Twenty years ago, Teachers was already being recognized as a potentially significant source of capital for Canadian mergers and takeovers. But the then-$35-billion pension fund was limited in its investments by the depth of Canada’s capital markets, because federal pension laws capped foreign investments at no more than 20 per cent of the total fund.

While finding its footing in the Canadian private-investment world, Teachers private-capital team encountered criticisms that it didn’t have the knowledge and experience needed to influence corporate management and boards when it took large stakes in companies, or led hostile bids.

Two decades later, Teachers Private Capital has proven its ability to turn companies around at home and abroad – it built up investments in North America, Europe, Asia, Africa and South America and now has about 70 investment professionals. But the group is being tested in other ways. Keeping the international team focused, engaged and committed to Teachers is the challenge Ms. Rowe thinks about most. “I’m always worried somebody’s going to poach them or steal them,” she says.

There’s also a lot more competition out there for Teachers, not only from other Canadian pension funds that have developed their own robust private-equity investment arms, but from investors around the world. The amount of available money piling up with private equity fund managers, called dry powder by industry insiders, hit a record $839-billion (U.S.) globally in September, 2016, according to research firm Preqin. That has grown from a little more than $500-billion a decade ago.

Teachers’ private equity team feels the pressure to prove they can outperform stock indexes that can be bought and managed without the same expense. “You can do that in part through leverage, but really what we kind of say is fundamentally you need to find sectors that you hope are going to outperform GDP over an extended period of time,” Ms. Rowe said.

That’s why Teachers toasted its quarter-century with a $1.03-billion (Canadian) deal for wine-producer Constellation Brands Inc. this fall, giving the pension plan a cellar full of top wine brands such as Kim Crawford and Jackson-Triggs. Teachers’ estimates that Canadian wine consumption is growing at about 4 per cent to 5 per cent annually, compared to a couple of per cent for Canadian GDP.

This deal also recalls Teachers’ earlier investments. In the 1990s, the pension plan took a 23-per-cent stake in wine producer Vincor International Inc. for $13-million – a much smaller cheque size than would turn its head today. Teachers later helped the business leap to the public markets. Vincor was then acquired by Constellation Brands about 10 years ago. Now, it’s returning to the Teachers stable.

The fund does more direct investing than it used to, which has made its relationships with other private-equity investors more important.

“The further you go in geography from home, the more you should probably have a smart friend at the table as you are doing those transactions,” Ms. Rowe said. “If an opportunity came in, for argument’s sake, for Colombia or Korea, you know, I’d be kind of saying what makes a Teachers’ here at Yonge and Finch the go-to provider of capital there?”

As Teachers built its reputation as an investor among other international private equity heavyweights, it has also relied on its wholesome brand. Everyone has been to school and can relate to paying the pensions of hard-working teachers. It’s a tougher sell for private equity firms, which are perceived as making money purely to fatten the pockets of their top brass, Ms. Rowe says. “It’s easier to make why we do our investing resonate.”

While I welcome OPE's success in going direct, OMERS still needs to invest in private equity funds. And some of Canada's largest pensions, like CPPIB, will never go direct in private equity because they don't feel like they can compete with top funds in this space.

[Note: It might help if OPE reports the IRR of their direct operations, net of all expenses relative to the IRR of their fund investments, net of all fees so their stakeholders can understand the pros and cons of going direct in private equity. Here you need to look at a long period.]

There is a lot of misinformation when it comes to Canadian pensions 'going direct' in private equity. Yes, they have a much longer investment horizon than traditional funds which is a competitive advantage, but PE funds are adapting and going longer too and in the end, it will be very hard, if not impossible, for any Canadian pension to compete with top PE funds.

I am not saying there aren't qualified people doing wonderful work investing directly in PE at Canada's large pensions, but the fact is it will be hard for them to match the performance of top PE funds, even after fees and expenses are taken into account.

Who knows, maybe OPE will prove me wrong, but this is a tough environment for private equity and I'm not sure going direct in this asset class is a wise long-term strategy (unlike infrastructure, where most of Canada's large pensions are investing directly).

RedBird Capital Partners (“RedBird”) and Ontario Teachers’ Pension Plan (“Ontario Teachers’”) today announced an investment in Compass Datacenters, LLC (“Compass” or the “Company”) in partnership with the Company’s management team, which includes Founder and CEO Chris Crosby. The existing management team will continue to lead the business and execute the Company’s growth strategy, which is supported by long-term, flexible capital from Compass’s new investment partners. Financial terms of the transaction were not disclosed.

“The next major wave of growth in the data center industry will be driven by the need for dedicated data centers that address technology trends including large-scale Internet of Things deployments, edge computing strategies that reduce latency, rapid delivery of new applications, and more,” said Chris Crosby. “I couldn’t be happier about welcoming RedBird and Ontario Teachers’ to our team, as it provides Compass with the financial resources to fund the next phase of our growth with partners who have deep domain expertise in the industry. We will continue serving as a trusted, behind-the-scenes provider to large-scale users in this multi-billion market which is experiencing impressive double-digit growth.”

Based in Dallas, Texas, Compass is a leading wholesale data center developer, specializing in customized build-to-order solutions for enterprise, cloud computing, and service provider customers. Compass focuses on solving customer needs through its patented architecture, scalable design, low cost of ownership model, and overall speed to market. Compass’s solutions also enable customers to locate their dedicated facilities anywhere. This functionality provides customers with the degree of geographic flexibility necessary as the Internet of Things (IoT) and large rich packet applications (such as video and augmented reality) require data centers to be located closer to end users. Compass CEO Chris Crosby was a founding member of the second-largest data center company in the world and leads a team that has collectively built over $3 billion of data centers globally and operated more than six million square feet of space.

“Compass’s unique solutions align perfectly with the way data center needs are evolving for large cloud/SaaS providers, corporate customers and service providers, and this investment gives Compass significant resources to take advantage of market opportunities,” said Robert Covington, Partner of RedBird Capital. “Compass now has the ability to develop larger, multi-phase projects for customers, as well as to invest in the acquisition of real estate in markets that support customer needs. Compass is one of the great stories in the data center industry, and we are proud to be part of the team’s growth strategy.”

“This investment enables Compass to significantly advance its growth plan, maintain its focus on innovative customer solutions and continue to leverage the experience and knowledge of its talented management team,” said Jane Rowe, Senior Managing Director, Private Capital, Ontario Teachers’. “We recognized that Compass is a leader in its market segment and, through this partnership, is very well positioned to serve as the trusted data center partner for even more customers whose evolving technology needs can be met by the facilities that Compass designs and builds.”

DH Capital served as exclusive financial advisor to Compass Datacenters on the transaction.

The recent blow-up of the Dallas Police and Fire Pension System was entirely predictable. Whilst it is tempting to blame unusual circumstances for the recent lock-up of redemptions and likely substantial reductions to pensions for those still in the fund, many other American pension funds are heading down the same road. The combination of overpriced financial markets, inadequate contributions and overly generous pension promises mean dozens of US local and state government pension plans will end up in the same situation. The simple maths and political factors at play mean what happened at GM, Chrysler, Detroit and now Dallas will happen nationwide in the coming decade. So, what’s happened in Dallas and why will it happen elsewhere?

The Dallas pension scheme has been underfunded for many years with the situation accelerating recently. As the table below shows, as at 1 January 2016 the pension plan had $2.68 billion of assets (AVA) against $5.95 billion of liabilities (AAL), making the funding ratio (AVA/AAL) a mere 45.1%. Despite equity markets recovering strongly over the last seven years, the value of the assets has fallen at the same time as the value of the liabilities has grown rapidly. The story of how such a seemingly odd outcome could occur dates back to decisions made long before the financial crisis (click on image).

Source: Dallas Police and Fire Pension System

In the late 1990’s, returns in financial markets had been strong for years leading many to believe that exceptional returns would continue. In this environment, the board that ran the Dallas plan decided that more generous pension terms could be offered to employees and that these could be funded by the higher expected returns without needing greater contributions from the Dallas municipality and its taxpayers. Exceptionally generous terms were introduced including the now notorious DROP accounts and inflated assumptions for cost of living adjustments (COLA). These changes meant that pension liabilities were guaranteed to skyrocket in future years, whilst there was no guarantee that investment returns and inflation levels would also be high. Dallas police and fire personnel were being offered the equivalent of a free lunch and they took full advantage.

In the 2000’s the pension plan made some unusual investment decisions. A disproportionate amount of plan assets were invested in illiquid and exotic alternative investments. When the financial crisis struck these assets didn’t decline as much as the assets of other pension plans. However, this was merely a deferral of the inevitable write downs which came in the last two years after a change in management.

Dallas Pension – Recent Events

Throughout 2016 the pension board, the municipality and the State government bickered over who was responsible and who should pay to fix the mess. The State government blamed the municipality for the poor investment decisions. The municipality blamed the State government for creating a system that it could not control but was supposed to be responsible for. It also blamed the pension board for the overly generous changes they implemented. The pension board recognised the huge problem but offered only minor concessions arguing that plan participants were entitled to be paid in full in all circumstances. They asked the municipality for a one-off addition of $1.1 billion, equivalent to almost one year’s general fund revenue for the municipality.

As the funding ratio plummeted during 2016, plan participants became concerned that their generous pension entitlements might not be met. In other pension plans the employer might increase its contributions when these circumstances occurred, but in Dallas the municipality was already paying close to the legislative maximum. Police officers with high balances retired in record numbers, pulling out $500 million in four months in late 2016. Those who withdrew received 100% of what was owed, with those remaining seeing their position as measured by the funding ratio deteriorate further.

In November, when faced with $154 million of redemption requests and dwindling liquid assets, the pension board suspended redemptions. The funding ratio is now estimated to be around 36% with assets forecast to be exhausted in a decade. Litigation has begun with some plan participants suing to see their redemption requests honoured. The municipality has indicated it wants to claw back some of the generous benefits accrued since the changes in the 1990’s, though this is likely to only impact those who didn’t redeemed. The State has begun a criminal investigation. Everyone is looking to blame someone else, but not everyone has accepted that drastic pension cuts are inevitable.

Dallas Pension – The Interplay of Political Decisions and Financial Reality

The factors that led to Dallas pension fiasco are all too common. Politicians and their administrations often make decisions that are politically beneficial without taking into account financial reality. A generous pension scheme keeps workers and their unions onside, helping the politicians win re-election. However, the bill for the generosity is deferred beyond the current political generation, with unrealistic assumptions of future returns enabling the problem to be obscured. As financial markets tend to go up the escalator and down the elevator it is not until a market crash that the unrealistic return assumptions are exposed and the funding ratio collapses.

This is when a second political reality kicks in. In the case of Dallas, there are just under 10,000 participants in the pension plan compared to 1.258 million residents in the municipality. Plan participants therefore make up less than 1% of the population. If the Dallas municipality chose to fully fund the Dallas pension plan it would be require an enormous increase in taxes from the entire population in order to fund overly generous pensions for a very small minority of the population. For current politicians, it is far easier to blame the previous politicians and the pension board for the mess and see pensions for a select group cut by half or more than it is to sell a massive tax increase.

The legal position remains murky and it will take some time to clear up. The municipality is paying 37.5% of employee benefits into the pension plan, the maximum amount required by state law. Without a change in state legislation, it seems likely that the Dallas pension plan will have to bear almost all of the financial pain through pension reductions. If state legislation was changed to increase the burden on the municipality years of litigation could ensue with the potential for the municipality to declare bankruptcy as a strategic response. The appointment of an administrator during bankruptcy could see services reduced and/or taxes increased, but pension cuts would be all but a certainty.

Dallas Pension Isn’t the First and Won’t be the Last

It’s tempting to see the generous pension structure and bad investment decisions in Dallas as making it a special case. Detroit was seen by many as a special case when it went into bankruptcy in 2013 as it had seen its population fall by 25% in a decade. This depopulation left a smaller population base trying to fund the debt and pensions obligations incurred when the population was much larger. Growing debt and pension obligations are signs of what is to come for many local and state governments who have been living beyond their means for decades.

As well as building up pension obligations many US governments have been accruing explicit debt. The two are intertwined, with some governments issuing debt to make payments into their pension plans, often to close the underfunding gap. This is very much a short-term measure, as whether it is pension contributions or debt repayments both will either require high taxes and/or lower spending on government services in the future in order for these payments to be met.

Pew Charitable Trusts researchestimates a $1.5 trillion pension funding gap for the states alone, with Kentucky, New Jersey, Illinois, Pennsylvania and California going backwards at a rapid rate. Using a wider range of fiscal health measures the Mercatus Center has the five worst states as Kentucky, Illinois, New Jersey, Massachusetts and Connecticut. The table below shows the five state pension plans in Illinois, with an average funded ratio of just 37.6% (click on image).

Dallas Pension Source: Illinois Commission on Government Forecasting and Accountability

For cities, Chicago is likely to be the next Detroit with the city and its school system both showing signs of financial distress. Chicago is trying to stem the bleeding with a grab bag of tax and other revenue increases but in the long term this makes the overall position worse.

Default is Almost Inevitable as the Weak get Weaker

The problem for Chicago and others trying to pay their debt and pension obligations by raising taxes is that this makes them unattractive destinations for businesses and workers. Growth covers many sins, as growth creates more jobs and drags more people into the area. This increases the tax base and lessens the burden from previous commitments on those already there. Well managed, low tax jurisdictions benefit from a positive feedback loop.

For states and municipalities in decline, their best taxpayers are the first to leave when the tax burden increases. Young college educated workers with professional jobs generate substantial income and sales tax revenue but require little in the way of education and healthcare expenditure. This cohort has many options for work elsewhere and can easily relocate. Chicago and Illinois are bleeding people, with the flight of millionaires particularly detrimental on revenues.

Those who own property are caught in a catch 22; property taxes and declining population have pushed property prices down, potentially creating negative equity. But staying means a bigger drain on the household budget as property taxes are the most efficient way to raise revenue and therefore become the tax increased the most. If too many people leave property prices plummet as they have in Detroit, making it even more difficult to collect property taxes as these are typically calculated as a percentage of the property valuation. Bankruptcy becomes inevitable as a poorer and older population base that remains simply cannot support the debt and pension obligations incurred when the population base was larger and wealthier.

Dallas Pension – Will be Reduced, but Bondholders Will Fare Worst

The playbook from the Detroit bankruptcy is likely to be used repeatedly in the coming decade. When a bankruptcy occurs and an administrator is appointed a very clear order of priority emerges. Firstly, services must be provided otherwise voters/taxpayers will leave or revolt. There may need to be cuts to balance the budget but if there is no police force, water or waste collection the city will cease to function.

Secondly, pensions will be reduced to match the available assets quarantined to meet pension obligations and the ability of the budget to provide some contribution. If the budget doesn’t have capacity or the legal obligation to contribute more to pension funding, pensioners should expect their payments to be cut to something like the funding percentage. For Dallas and the Dallas pension plans in Illinois this means payments cut by more than half.

Third in line are financial debtors. Bondholders and lenders don’t vote and they are seen as a bunch of faceless wealthy individuals and institutions who mostly reside out of state. They effectively rank behind pensioners, who are people who predominantly reside in the state and who vote, even though the two groups technically might rank equally. This makes state and local government debt a great candidate for a CDS short as the recovery rate for unsecured debt is usually awful in the event of default.

Dallas Pension Canary In Coal Mine? The Next Crisis Will Trigger an Avalanche

At the risk of being labelled a Meredith Whitney style boy who cried wolf I expect that the next financial crisis will trigger a wholesale revaluation of the creditworthiness of US state and local government debt. I have no crystal ball for when this will happen, but it is almost certain that the next decade will contain another substantial decline in asset prices. This will impact state and local governments and their pension obligations in two major ways.

Firstly, asset prices will fall causing underfunded pensions to become even more obviously insolvent. Most US defined benefit pension funds are using 7.50% – 8.00% as their future return assumption. Using a 7.50% return assumption for a 60/40 stock/bond portfolio, with ten year US treasuries at 2.50%, implies equities will return 10.8% every year going forward. In a low growth, low inflation environment this might be achievable for several years, but an eventual market crash will destroy any outperformance from the good years. The continued use of such high return assumptions is unrealistic and is being used to kick the can further down the road. The largest US public pension fund, Calpers, has recognised this and is reducing its return expectations from 7.50% to 7.00% over three years. This still implies a 10% return on equities for a 60/40 portfolio.

Secondly, downturns cause a reassessment of all types of debt with the highest risk and most unsustainable debt unable to be renewed. State and local governments with a history of increasing indebtedness and no realistic plan for reducing their debts may become unable to borrow at any price. This will force them to seek bankruptcy or an equivalent restructuring process. Once this happens for one mainland state (Illinois looks likely to be the first) lenders will dramatically reprice the possibility that it could happen elsewhere. Those who think states cannot file for bankruptcy should watch the process occurring in Puerto Rico, it will be repeated elsewhere. Barring a federal bailout, an overly indebted state or territory has no alternative other than to default on its debts. Raising taxes or cutting services will see the city or state depopulated. Politicians and voters are strongly incentivised to default.

Dallas Pension – Conclusion

Chronic budget deficits, growing indebtedness, excessive pension return assumptions and pension underfunding all set the stage for a wave of state and local government pension and debt defaults in the coming decade. As Detroit has shown this century, once an area loses its competitiveness its financial viability spirals downward. As taxes increase and services are cut the wealthiest and highest income earners leave slashing government revenues and increasing the burden on the older and poorer population that remains.

The next substantial fall in asset prices will sharpen the focus on budget deficits and pension underfunding, with the most indebted and underfunded states likely to find they are unable to rollover their debts at any price. Remaining residents will be negatively impacted, pensioners will see their payments slashed and bondholders will recover little, if any, of their debt. As there is virtually no political will to take action to avoid these problems investors should position their portfolios in expectation that these events will happen.

Written by Jonathan Rochford for Narrow Road Capital on January 17, 2017. Comments and criticisms are welcomed and can be sent to info@narrowroadcapital.com

Disclosure

This article has been prepared for educational purposes and is in no way meant to be a substitute for professional and tailored financial advice. It contains information derived and sourced from a broad list of third parties, and has been prepared on the basis that this third party information is accurate. This article expresses the views of the author at a point in time, and such views may change in the future with no obligation on Narrow Road Capital or the author to publicly update these views. Narrow Road Capital advises on and invests in a wide range of securities, including securities linked to the performance of various companies and financial institutions.

The combination of overpriced financial markets, inadequate contributions and overly generous pension promises mean dozens of US local and state government pension plans will end up in the same situation. The simple maths and political factors at play mean what happened at GM, Chrysler, Detroit and now Dallas will happen nationwide in the coming decade. So, what’s happened in Dallas and why will it happen elsewhere?

Que ce soit en raison des risques géopolitiques, de la montée du protectionnisme ou de l'arrivée du républicain Donald Trump à la Maison-Blanche, le président et chef de la direction de la Caisse de dépôt et placement du Québec (CDPQ), Michael Sabia, repart du Forum économique de Davos avec de nombreuses interrogations.

Tout cela n'est toutefois pas suffisant pour l'inciter à modifier les stratégies mises en place au cours des dernières années par l'investisseur institutionnel, dont l'actif atteignait 254,9 milliards en date du 30 juin dernier.

«Je n'ai pas changé d'avis. Avec un monde incertain, notre stratégie est de bien sélectionner les actifs et de nous éloigner, dans la mesure du possible, des risques du marché», a-t-il dit, jeudi, au cours d'un entretien avec La Presse canadienne, avant de quitter les alpes suisses.

M. Sabia a donné comme exemple la cimenterie de Port-Daniel, dont la construction a été marquée par des dépassements de coûts de l'ordre de 450 millions avant que la CDPQ prenne le contrôle du projet en y injectant 125 millions de plus. En redressant des actifs de la sorte, le grand patron de la Caisse estime qu'il est possible de créer de la valeur indépendamment de la volatilité des marchés, ce qui mitige les risques.

L'institution continuera également à se tourner vers les infrastructures ainsi que l'immobilier, des actifs «stables» à long terme, a précisé M. Sabia.

À l'instar des nombreux participants du Forum, le dirigeant de la Caisse a pris part à des ateliers dans lesquels les discussions ont tourné autour des visées protectionnistes de M. Trump, qui deviendra vendredi le 45e président des États-Unis.

«Beaucoup semblent convaincus que cette nouvelle administration mettra en vigueur des politiques au coeur des préoccupations du monde des affaires et qui vont dynamiser l'économie rapidement en 2017, a dit M. Sabia. J'ai trouvé cela surprenant, parce que c'est très axé sur le court terme.»

Il dit avoir du mal à comprendre l'optimisme de certains à Davos en raison d'un «mur de risques». Il cite l'arrivée de M. Trump, la sortie attendue du Royaume-Uni de l'Union européenne et d'importantes élections à venir en Europe, notamment en France et en Allemagne.

M. Sabia estime qu'il faut donner six mois à la nouvelle administration républicaine à Washington, étant donné qu'elle veut «faire des choses difficiles». Déjà, Wilbur Ross, désigné par M. Trump pour devenir secrétaire américain au Commerce, a prévenu que le nouveau gouvernement se pencherait rapidement sur l'Accord de libre-échange nord-américain (ALENA).

Le sujet des infrastructures a été largement discuté à Davos, puisque plusieurs représentants de firmes d'ingénierie et d'investisseurs institutionnels - qui se tournent vers ces actifs pour diversifier leur exposition aux risques - étaient présents.

«Ç'a été une confirmation qu'il s'agit d'un vecteur de croissance important dans le monde», a affirmé M. Sabia, lorsque questionné quant au message qu'il a tiré des discussions.

En date du 31 décembre dernier, la valeur du portefeuille de la Caisse dans les infrastructures était de 13 milliards, comparativement à 10,1 milliards en 2014.

Par ailleurs, malgré les visées protectionnistes de M. Trump, M. Sabia ne s'est pas inquiété pour l'avenir de la cimenterie de Port-Daniel, qui vise les États-Unis comme principal marché d'exportation.

Si le 45e locataire de la Maison-Blanche veut vraiment aller de l'avant avec son intention d'injecter 1000 milliards US dans l'économie, les États-Unis n'auront d'autre choix que de laisser entrer du ciment en provenance de l'extérieur, croit M. Sabia.

«L'offre aux États-Unis ne serait pas suffisante pour répondre à une telle demande, a-t-il estimé. Selon moi, la priorité que cette administration veut mettre sur les infrastructures représente une belle occasion.»

Investors are starting to sour on the idea of reimbursing hedge funds for multi-million dollar trader bonuses, lavish marketing dinners and trophy office space.

Powerful firms such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called "pass-through" fees, which can include everything from a new hire's deferred compensation to travel to high-end technology.

It all adds up: investors often end up paying more than double the industry's standard fees of 2 percent of assets and 20 percent of investment gains, which many already consider too high.

Investors have for years tolerated pass-through charges because of high net returns, but weak performance lately is testing their patience.

Clients of losing funds last year, including those managed by Blackstone Group LP's (BX.N) Senfina Advisors LLC, Folger Hill Asset Management LP and Balyasny Asset Management LP, likely still paid fees far higher than 2 percent of assets.

Clients of shops that made money, including Paloma Partners and Hutchin Hill Capital LP, were left with returns of less than 5 percent partly because of a draining combination of pass-through and performance fees.

For a graphic on the hedge funds that passed through low returns, click on image below:

Millennium, the $34 billion New York firm led by billionaire Israel Englander, charged clients its usual fees of 5 or 6 percent of assets and 20 percent of gains in 2016, according to a person familiar with the situation. The charges left investors in Millennium's flagship fund with a net return of just 3.3 percent.

Citadel, the $26 billion Chicago firm led by billionaire Kenneth Griffin, charged pass-through fees that added up to about 5.3 percent in 2015 and 6.3 percent in 2014, according to another person familiar with the situation. Charges for 2016 were not finalized, but the costs typically add up to between 5 and 10 percent of assets, separate from the 20 percent performance fee Citadel typically charges.

Citadel's flagship fund returned 5 percent in 2016, far below its 19.5 percent annual average since 1990, according to the source who, like others, spoke on the condition of anonymity because the information is private.

All firms mentioned declined to comment or did not respond to requests for comment.

In 2014, consulting firm Cambridge Associates studied fees charged by multi-manager funds, which deploy various investment strategies using small teams and often include pass-throughs. Their clients lose 33 percent of profits to fees, on average, Cambridge found.

The report by research consultant Tomas Kmetko noted such funds would need to generate gross returns of roughly 19 percent to deliver a 10 percent net profit to clients.

'STUNNING TO ME'

Defenders of pass-throughs said the fees were necessary to keep elite talent and provide traders with top technology. They said that firm executives were often among the largest investors in their funds and pay the same fees as clients.

But frustration is starting to show.

A 2016 survey by consulting firm EY found that 95 percent of investors prefer no pass-through expense. The report also said fewer investors support various types of pass-through fees than in the past.

"It's stunning to me to think you would pay more than 2 percent," said Marc Levine, chairman of the Illinois State Board of Investment, which has reduced its use of hedge funds. "That creates a huge hurdle to have the right alignment of interests."

Investors pulled $11.5 billion from multi-strategy funds in 2016 after three consecutive years of net additions, according to data tracker eVestment. Redemptions for firms that use pass-through fees were not available.

Even with pass-through fees, firms like Citadel, Millennium and Paloma have produced double-digit net returns over the long-term. The Cambridge study also found that multi-manager funds generally performed better and with lower volatility than a global stock index.

"High fees and expenses are hard to stomach, particularly in a low-return environment, but it's all about the net," said Michael Hennessy, co-founder of hedge fund investment firm Morgan Creek Capital Management.

INTELLECTUAL PROPERTY

Citadel has used pass-through fees for an unusual purpose: developing intellectual property.

The firm relied partly on client fees to build an internal administration business starting in 2007. But only Citadel's owners, including Griffin, benefited from the 2011 sale of the unit, Omnium LLC, to Northern Trust Corp for $100 million, plus $60 million or so in subsequent profit-sharing, two people familiar with the situation said.

Citadel noted in a 2016 U.S. Securities and Exchange Commission filing that some pass-through expenses are still used to develop intellectual property, the extent of which was unclear. Besides hedge funds, Citadel's other business lines include Citadel Securities LLC, the powerful market-maker, and Citadel Technology LLC, a small portfolio management software provider.

Some Citadel hedge fund investors and advisers to them told Reuters they were unhappy about the firm charging clients to build technology whose profits Citadel alone will enjoy. "It's really against the spirit of a partnership," said one.

A spokesman for Citadel declined to comment.

A person familiar with the situation noted that Citadel put tens of millions of dollars into the businesses and disclosed to clients that only Citadel would benefit from related revenues. The person also noted Citadel's high marks from an investor survey by industry publication Alpha for alignment of interests and independent oversight.

Gordon Barnes, global head of due diligence at Cambridge, said few hedge fund managers charge their investors for services provided by affiliates because of various problems it can cause.

"Even with the right legal disclosures, it rarely passes a basic fairness test," Barnes said, declining to comment on any individual firm. "These arrangements tend to favor the manager's interests."

When you look at who attended last week’s World Economic Forum in Davos, it’s striking how many are global investors or work for large funds – and in particular, private-equity firms.

The question Canadians should be asking themselves is, how do we ensure that Canada receives its fair share of the trillions of dollars deployed by global investment funds, including real estate, infrastructure, venture capital and private equity? How can our entrepreneurs and company owners benefit from this growth capital and the opportunities that come with it?

How can we create an investment ecosystem that gives rise to more Canadian investment firms led by top professionals?

The global investors who gathered in Davos, Switzerland, have much to be thankful for. Business is thriving and the various private asset classes’ performance keeps pumping up demand, especially relative to fixed income and public equities. Take private equity, for example: 94 per cent of investors in a recent survey count themselves satisfied with the returns, and more than 85 per cent say they intend to commit more or the same amount of capital to private equity next year. As a result, the capital flowing into private equity is unprecedented, established firms are raising record amounts of money and fund oversubscription is common.

More than 600 new private-equity funds were created last year alone and the industry is holding $1.3-trillion (U.S.) of “dry powder,” or uninvested capital, that is sitting on the sidelines waiting to be invested. While the merits and operating model of private equity can and should be debated (as they were when former private-equity man Mitt Romney ran for president in the 2012 U.S. election), there is no denying its growing importance in many economies. Carlyle Group and Kohlberg Kravis Roberts & Co. (and their portfolio companies) employ more people than any other U.S. public company outside of Wal-Mart Stores Inc.

The sector’s roaring success might also be the biggest risk to its future. There might be such a thing as too much money, after all.

A swath of new entrants is pouring into private assets, searching for yield in a world of low interest rates. Chinese, Middle Eastern and other emerging markets investors are on the rise and have quadrupled their outbound investment over the past few years. Sovereign wealth funds, pension plans, insurance companies and even some mutual funds are allocating money to the private markets and borrowing from their playbooks. So much money chasing a limited number of opportunities has pushed prices up: historically high multiples combined with lower levels of leverage are putting pressure on returns. Private-equity deal multiples, for example, have exceeded the peaks last seen in 2006-07 for larger transactions (deals above $500-million) and deals above $250-million are also flirting with these highs. But most indicators still point to a favourable outlook as long as the credit markets remain fluid and fund managers continue to create value during their ownership period.

Canadian pension funds, many of which were present at Davos, are increasingly active in this crowded field. They have invested time and money to develop direct capabilities and increasingly stronger investment teams. In many regards, they are years ahead of their peers around the world. However, outside of our pension funds and a few select local firms, Canada tends to punch under its weight. We lack the kind of developed investment ecosystems that are thriving in other countries. As an example, the United States has 24 times more private-equity funds than Canada and has raised nearly 40 times more capital over the past 10 years.

The point is broader: Canada should be attracting more foreign direct investment, including money from global investment firms. FDI in Canada has grown by just 2 per cent a year since 2005, compared with an average of 7 per cent for all OECD countries and 8 per cent for Australia. As a percentage of GDP, Canada still sits in the middle of pack of OECD countries, but 30 per cent of that investment is driven by mining and oil and gas and is heavily skewed to M&A as opposed to greenfield investment (relative to other countries).

Something doesn’t add up. Canada is a great place to put money to work. We are a country with low political risk, competitive corporate taxes, an educated and diverse labour force, liquid public markets and a real need for infrastructure investments. Yet, we are net exporters of capital: foreign investors are often not finding Canadian opportunities as attractive as they should.

For all the criticism the investment industry sometimes faces, it would be a real miss if we failed to show long-term, growth-minded investors that Canada is an attractive place to put their money to work. We want global investors writing cheques for stakes in Canadian companies, so they can help improve their productivity, invest in technology, create new jobs, and grow global champions in many industries. If investors don’t hear our compelling story, Canada and many of its companies could be left on the sidelines as they watch all this dry powder get deployed in other markets.

Explaining that challenging investment times demand “we adapt to succeed,” the new head of the Harvard Management Company (HMC) announced sweeping internal changes today, including a major shift in investment strategy, workforce reductions, and a compensation system tied to the overall performance of the University’s endowment.

N.P. Narvekar, who took over as HMC’s president and chief executive officer on Dec. 5, immediately began executing his reorganization, announcing four new senior hires: Rick Slocum as chief investment officer, and Vir Dholabhai, Adam Goldstein, and Charlie Savaria as managing directors.

“Major change is never easy and will require an extended period of time to bear fruit,” Narvekar said in a letter announcing the moves. “Transitioning away from practices that have been ingrained in HMC’s culture for decades will no doubt be challenging at times. But we must evolve to be successful, and we must withstand the associated growing pains to achieve our goals.”

Founded in 1974, HMC has overseen the dramatic growth in the University’s endowment that has made it, at $35.7 billion, the largest in higher education. Made up of more than 13,000 funds, many of them restricted to particular purposes, the endowment is intended to provide financial stability year to year for the University. In the last fiscal year, which ended on June 30, endowment funds provided $1.7 billion, more than a third of the University’s $4.8 billion budget. Such endowment income supports Harvard’s academic programs, science and medical research, and student financial aid programs, which allow the University to admit qualified students regardless of their ability to pay.

During the 1990s and early 2000s, returns on Harvard’s endowment regularly outstripped those of other institutions, making HMC a model for endowment management. Since the market crash of 2008, however, endowment performance has been up and down. Last year, endowment returns fell 2 percent, dropping the value below the $36.9 billion high-water mark reached in the 2008 fiscal year.

Narvekar has decided to shift from the policy of using both in-house and external fund managers that had made HMC’s approach to investing unique. In recent years, he said in his letter, competition has intensified for both talent and ideas, making it tougher to both find and retain top managers and exploit “rapidly changing opportunities.”

In what he called “important but very difficult decisions,” Narvekar announced that the in-house hedge fund teams would be leaving HMC by July, and the internal direct real estate investment team would leave by the end of the calendar year. The natural resources portfolio, meanwhile, will remain internally managed. Altogether, he said, the changes will trim HMC’s 230-person staff roughly in half.

“It is exceptionally difficult to see such a large number of our colleagues leave the firm, and we will be very supportive of these individuals in their transition,” Narvekar said. “We are grateful for their committed service to Harvard and wish them the very best in their future endeavors.”

The changes are in step with an overall strategy shift that will move away from what Narvekar called a silo investing approach, wherein managers focus on specific types of investments — whether stocks, bonds, real estate, or natural resources — to one in which everyone’s primary goal is overall health and growth for the endowment.

The problem with the silo approach, Narvekar said, is that it can create both gaps and duplication in the overall portfolio.

“This model has also created an overemphasis on individual asset class benchmarks that I believe does not lead to the best investment thinking for a major endowment,” Narvekar added.

Narvekar sees his incoming “generalist model,” which is employed at some other universities, as fostering a “partnership culture” in which the entire team debates investing opportunities within and across asset classes.

Narvekar, who previously oversaw the endowment at Columbia University, said he would encourage managers to be open-minded and creative as they move forward, adding that the generalist model is flexible enough that, under the proper circumstances, it could again allow for hiring in-house managers down the road.

“While I don’t expect a large portion of the portfolio to be managed internally as a practical matter … nothing is out of bounds in the future,” he said.

Narvekar expects a five-year transition period for the changes to be fully implemented, and although he warned that investment performance will likely be “challenged” this year, by the end of the calendar year organizational changes should have taken hold and HMC will look and act differently.

In effect, HMC’s compensation structure will move away from a system where managers are compensated based on how their siloed investments perform relative to benchmarks. The new system, to be implemented by July, will be based on the endowment’s overall performance.

In a press release, Narvekar said he has known the four executives brought aboard to implement the changes for much of his career. Three of them — Dholabhai, Goldstein, and Savaria — have earlier experience at the Columbia Investment Management Co. where Narvekar was CEO. The fourth, Slocum, who starts as chief investment officer in March, comes to Harvard from the Johnson Company, a New York City-based investment firm. He has worked at the Robert Wood Johnson Foundation and the University of Pennsylvania.

In addition to his experience at Columbia, Dholabhai, who starts on Monday, was most recently the senior risk manager for APG Asset Management US. Goldstein, who starts on Feb. 6, comes directly from Columbia, where he was managing director of investments. Savaria, who also starts on Monday, co-managed P1 Capital.

“I am pleased to welcome four senior investors to HMC who bring substantial investment expertise and deep insight into building and working in a generalist investment model and partnership culture,” Narvekar said. “I have known these individuals both personally and professionally for the majority of my career, and I value their insights and perspectives.”

Mark Williams, a Boston University executive-in residence who specializes in risk management, said the moves mark the end of a long, painful realization that its strategy was failing, a capitulation he considered “long overdue."

Williams said the move will mark an opportunity for outside managers eager to oversee funds for such a prestigious client: "It’s going to be a bonanza for those money shops.”

" ....the Hegelian process of change in which a concept or its realization passes over into and is preserved and fulfilled by its opposite... development through the stages of thesis, antithesis, and synthesis in accordance with the laws of dialectical materialism ....any systematic reasoning, exposition, or argument that juxtaposes opposed or contradictory ideas and usually seeks to resolve their conflict ...the dialectical tension or opposition between two interacting forces or elements."

Denmark’s biggest pension fund has halved the amount of money it outsources to external asset managers over the past two years, arguing that increased scrutiny of costs and transparency has made hiring them untenable.

ATP, which manages DKr806bn (£91bn) for 5m Danish pensioners, used to allocate more than a third of its DKr101bn (£11.4bn) investment assets to external fund managers.

However, Kasper Lorenzen, the chief investment officer, told FTfm that this has halved to 19 per cent since December 2014, a loss of DKr19.3bn (£2.2bn) for the industry.

“Some of these more traditional, old-school mandates, where you hire some asset manager, and then they track a benchmark and try to outperform by 14 basis points . . . we kind of tried to get rid of that,” Mr Lorenzen said.

He added that after the financial crisis investors wanted cheaper options. “I think the main thing is that there is more focus on costs. I think there is more transparency. There are really low-cost implementation vehicles [out] there.”

ATP joins a growing group of asset owners that have pulled money from active managers in favour of cheaper, passively managed funds, or more complicated investments in infrastructure, financial derivatives and property.

The California State Teachers’ Retirement System, the third-largest pension plan in the US, told FTfm in October that it plans to pull around $20bn from its external fund managers. It has already shifted $13bn of its assets in-house over the past year.

Alaska Permanent Fund, which manages $55bn, said this summer that it will retrieve up to half its assets from external managers, while AP2, the Swedish pension scheme, dropped mandates from external managers earlier this year. AP2 has moved more than $6bn from asset managers to internal investment staff over the past three years.

Railpen, the £25bn UK pension scheme, also said last year it had achieved £50m of annual cost savings by cutting the number of external equity managers it worked with from 17 to two, and managing more money internally.

The active industry has come under pressure for failing investors with poor returns and high fees in an era of low interest rates where returns are more difficult to come by.

Last month the UK regulator sharply criticised the industry for charging high fees and generating significant profits despite failing to beat benchmarks.

Chris Rule, the man charged with investing £12bn on behalf of more than 232,000 current and former local authority workers in England, begins his meeting with the Financial Times earlier this month by apologising.

Standing in his office in Southwark in the south of London, he explains the air-conditioning is on the blink. It is a crisp, cold January evening, but Mr Rule’s small office, located in a building that also houses London Fire Brigade’s headquarters, is sweltering. It has been all day.

The building managers are on the case, he says, but for now the only way to cool down is to resort to shirt sleeves and big glasses of cold water.

Mr Rule seems unperturbed, if a little hot. It is hard to imagine that many chief investment officers across London would so easily shrug off such an uncomfortable office environment. But the father of three has other things on his mind, namely the radical overhaul happening across the UK’s local authority pension funds.

In 2015 George Osborne, the chancellor at the time, called on the 89 local authority retirement funds across England and Wales to create six supersized pension pots or “British wealth funds”.

The plan was that these funds would work together to reduce running costs and invest more in infrastructure. Since then, proposals for the formation of eight local authority partnerships have been put forward to the government for approval.

Mr Rule is the chief investment officer of one of these pools: the Local Pensions Partnership, or LPP, which was set up to oversee the combined assets of the London Pensions Fund Authority and the Lancashire County Pension Fund. The two pension schemes’ plans for a partnership predates Mr Osborne’s proposals, but his demands cemented their efforts.

Mr Rule says: “People [across local authorities] have done a lot of heavy lifting over the past 12 months and got the sector massively further forward than many stakeholders or commentators would have believed was possible in that space of time.”

Last month, LPP received the seal of approval from the government, when Marcus Jones, the UK minister for local government, signed off its plans. But the minister flagged some concerns, not least the size of the fund. LPP is short by almost half the £25bn figure Mr Osborne indicated he wanted the pooled funds to manage.

“It is no secret that the minister would like us to be that magic £25bn [in assets]. But it is important to realise that we are up and running; we are live today,” Mr Rule says.

LPP, which began operating in April 2016, is one of the few local authority partnerships that is already functioning. It has also received regulatory approval from the UK’s financial watchdog, unlike the majority of the other local authority pots.

Mr Rule’s job at LPP is highly pressured, especially at a time when record-low interest rates are hurting returns and driving up liabilities for retirement schemes. LPP has been tasked with undertaking the majority of the work that the two local authority funds once did, from asset allocation to pension administration.

The 38-year-old is at pains to stress that LPP has already used its increased scale to reduce costs for its two founding funds, despite falling far short of the desired level of assets.

The partnership has a far bigger allocation to infrastructure than other local authority pools. “At the size we are, we are already getting significant discounts when we are negotiating with third-party managers,” he says.

The former Old Mutual fund manager is now focused on axing asset managers in favour of running more money internally in order to cut costs.

“Our intention is to expand our internal capability, develop new internal strategies and therefore be able to insource more of the assets. That is clearly where we get the greatest fee savings, because we can operate at a much lower cost.”

Last November, LPP launched a £5bn global equity fund, consisting of the pooled cash of the LPFA and LCPF. About 40 per cent of the assets are managed internally by LPP, while a trio of fund houses — MFS, Robeco and Magellan — run the remaining 60 per cent.

Morgan Stanley, Harris Associates and Baillie Gifford, which previously ran equities for the pension funds, were axed as a result. This move is expected to save £7.5m a year in investment management costs. The trend of cutting managers is set to continue as part of Mr Rule’s aim of running around half of LPP’s assets internally, up from a third currently.

The managers most at risk are those running equities: Mr Rule would like to manage about 80 per cent of LPP’s investments in stock markets internally.

But he adds: “I would never expect to be 100 per cent internal. There will always be areas that we want to go and get [external] expertise for.

“We are only going to allocate money internally where we believe that is better than anything we can get externally. There is no point saving £5m in costs if it costs us £30m in returns.”

If LPP manages more money itself, it needs to grow its investment team. There are 25 investment staff positions at LPP, almost double the combined size of the now-defunct investment teams at the two founding pension funds. Some of the LPP positions, however, are yet to be filled.

Mr Rule admits that convincing employees to switch from private sector asset management, where higher salaries are the norm and offices have working air con, is a difficult task.

“If they don’t care about anything apart from money, we are going to have a challenge attracting and retaining them because there is always going to be someone that will pay more than us,” he says. “We can offer people a degree of autonomy that perhaps they would not have in a traditional asset manager.”

As Mr Rule continues to extol the virtues of a career in a local authority pension fund, it starts to become clearer why he left the private sector.

“There is always a bit of a conflict with an asset management firm, and I say that having worked all my career in asset management firms. As an individual, sometimes it can cause you to question the merit of what you are doing,” he says. “We are the asset owner. It is not about how we can generate fee income and profitability for the [company]. We have a different lens we look through.”

Ron started the meeting by stating: "Beta is cheap but true alpha is worth paying for."What he meant was you can swap into any index for a few basis points and use the money for overlay alpha strategies (portable alpha strategies). His job back then was to find the very best hedge fund managers who can consistently deliver T-bills + 500 basis points in any market environment. "If we can consistently add 50 basis points of added value to overall results every year, we're doing our job."

He explained to me how he constructed the portfolio to generate the highest possible portfolio Sharpe ratio. Back then, his focus was mainly on market neutral funds and multi-strategy funds but they also invested in all sorts of other strategies that most pension funds were too scared to invest in (strategies that fall between private equity and public markets; that changed after the 2008 crisis). He wanted to find managers that consistently add alpha - not leveraged beta - using strategies that are unique and hard to replicate in-house.

The pension plan for UK universities has snapped up most of a $3.1bn portfolio of loans to asset managers, in a collaboration with Credit Suisse which highlights the shifting roles of banks and investors in the continent’s capital markets.

The £55bn Universities Superannuation Scheme has agreed to provide debt financing to private equity and asset management groups that have raised so-called direct lending funds. These funds make loans to medium-sized businesses, displacing traditional bank lending.

It comes as Credit Suisse undertakes a reordering of its business designed to reduce activity which requires large commitments of capital, in favour of advising clients in return for regular fees.

In the first deal of its kind for a UK pension fund, the collaboration begins with the Swiss investment bank offloading most of a portfolio of loans and loan commitments made in 2014 and 2015, typically lasting five to seven years. The bank, which retains a small portion of the original lending, will manage the pool of loans and arrange new financing for USS on the same basis.

Ben Levenstein, head of private credit and special situations for USS, said the pension fund allocates a quarter of its capital to investments where it can earn a higher income than equivalent securities in public markets, which can be easily bought and sold. “We do have a tolerance for illiquid assets,” he said.

The $3.1bn of existing lending commitments to groups such as GSO Capital Partners, part of the alternative investment group Blackstone, will eventually be backed by around $6bn of lending to medium-sized businesses, in competition with commercial banks.

“Non-bank lending is a structural shift in capital markets, and the asset managers want a funding source not reliant on bank financing,’’ said Jonathan Moore, co-head of credit products in Europe, the Middle East and Africa for Credit Suisse.

Several years of very low interest rates have forced pension funds to search for unusual sources of income, at the same time as regulatory changes have caused many banks to conserve capital. Since 2013, $119bn has been raised for direct lending, by more than 200 investment funds, according to Preqin, a data provider.

The funds typically lend to businesses with earnings before interest, taxes, depreciation and amortisation of less than €50m, too small to access public debt markets. A borrower might expect to pay 600-800 basis points above interbank borrowing costs, for a five-year loan.

Asset managers boost investment returns by raising debt against the funds. The lending commitments arranged by Credit Suisse are so-called senior loans, financing half the value of the underlying portfolio at low risk. The typical cost of such funding is around 250-300 basis points over interbank borrowing costs, according to participants in the market.

While the deal may be a model for institutional investors to follow, USS is unusual among large UK pension schemes which offer defined benefits to members in retirement. USS remains open to new members and continues to make new investments as contributions flow in.

In 2014, the Legislature finally addressed the $74 billion unfunded liability in the California State Teachers Retirement System (CalSTRS) Defined Benefit Program.

While long overdue, the Legislature’s action will significantly degrade California’s K-12 public education system. By placing the burden of paying down this debt primarily on school districts without providing any new funds to do it, the Legislature’s 30-year mandate will force stagnant wages and teacher layoffs.

The CalSTRS’ Defined Benefit Program provides pension benefits to our children’s teachers, who do not receive Social Security benefits. Teachers count on the CalSTRS benefits in pursuing a teaching profession.

The Legislature caused CalSTRS to become drastically underfunded. Under California law, the Legislature is the CalSTRS administrator — it sets the contributions into, and the benefits paid out of, CalSTRS. School districts have no control over contributions or benefits. In 2000, excited by temporary high investment returns, the Legislature passed a package of bills that increased CalSTRS retirement benefits without increasing the contributions necessary to pay for them, and in fact cutting the state’s contributions.

The mirage of endless high investment returns quickly vanished. A 2013 study found: “Had the Legislature not increased benefits, even if CalSTRS’s investments had still underperformed, the funding ratio would currently be 88.4 percent, thereby making CalSTRS one of the nation’s best-funded public pension plans.”

A 2013 report to the Legislature explained: “In 2001-02, when the DB Program first became underfunded, the state and employer contributed 90 percent of the amount needed to fully fund the program within 30 years. By 2011-12, that percentage had declined to 46 percent.” For over a decade, the Legislature ignored the CalSTRS Board’s warnings that the plan was underfunded, and it was getting worse.

In 2014, the Legislature adopted AB 1469, which seeks to pay down CalSTRS underfunding over about 30 years by relatively small increases in contributions from teachers and the State, and by increasing school districts’ contributions over seven years by 10.85 percent. In 2020, school districts’ CalSTRS contributions will be 19.1 percent of teacher payroll!

This is not sustainable. School districts are funded by the public to provide free public education; they do not make profits that can be devoted to paying off the Legislature’s CalSTRS debt. The Legislature did not provide any new funds to pay the significant CalSTRS’ increases. Worse, school districts are being hit twice.

Other school employees are covered by the California Public Employees’ Retirement System (CalPERS), and those contribution rates are projected to go up from 11.442 percent to 20.4 percent by 2020. Think of it this way. School districts spend about 60 percent of their budgets on teacher and staff compensation, so a 10 percent increase in retirement contributions means roughly 6 percent of the entire budget has to be reallocated from educating children to paying off underfunded pension plans.

School districts have few tools to manage their budgets. Absent sufficient funds, pretty quickly the ugly choice is to limit employee compensation or reduce the number of employees. Stagnant or declining compensation will reduce the pool of dedicated and qualified teachers. Teacher layoffs will impact children with larger class sizes and fewer courses. For school districts covering some of the CalSTRS and CalPERS increases with large LCFF “supplemental” and “concentration” grants, the impact may be deferred for a short time. For those districts without, the harm is now.

In Piedmont, where I have served on the Board of Education for the past eight years, the expected state LCFF funding increase in 2017-18 is less than the increase in CalSTRS and CalPERS contributions. For PUSD, the projected LCFF increase in 2017-18 is $196,000, while the CalSTRS and CalPERS increases are projected at $450,000. That’s a budget crisis even with no spending increases on employee compensation, health insurance contributions, Special Education, maintenance, instructional materials, technology, professional development, etc. Absent an increase in State funding, this will get worse as the contribution rates increase through 2020, and then persist until 2046.

The Oakland Unified School District faces significant deficits also. Some of this is caused by the CalSTRS and CalPERS increases. New funds from the state to cover this cost would help OUSD bring its budget back into balance.

Teachers cannot be expected to accept stagnant wages for decades. Good teachers will leave public schools and good candidates will avoid the teaching profession. Students will suffer from larger class sizes, reduced program, loss of counseling and poorer teaching. By placing the burden of paying off the CalSTRS debt on school districts, without any new funding, the Legislature is degrading, and may ruin, California’s public K-12 education system.

There are no easy solutions. The legislators in the 2000 Legislature put unfounded hope over fiscal prudence, and 15 years of adequate retirement contributions were lost. Now, the bill is due. The Legislature and Gov. Jerry Brown must act, and there are two choices, which can work in tandem. First, some budget surplus could be devoted to reducing the CalSTRS debt. Like any other loan, the quicker you pay it off, the less it costs. Second, the state must take responsibility for the portion that must be paid over time, either by increasing the state contribution rate and decreasing the school districts’ rate, or by providing new funding to school districts to pay the CalSTRS increases.

There are many demands on the state budget, but our children’s education must come first. Undoubtedly, this asks our current legislators, who mostly were not around in 2000, to make hard choices. But it must be done. Finally, once the Legislature has made these hard choices, it should then remove itself as CalSTRS pension manager and leave pension administration to professionals driven by their fiduciary duty to current and future retirees.

The California State Teachers' Retirement System will consider lowering its expected return rate to 7.25 percent from 7.5 percent, based on economic factors and improvements to beneficiaries' life expectancies.

CalSTRS Board is scheduled to consider the move during its February meeting. The recommendation was published late on Wednesday on the public pension fund's website.

The changes are based on new lower assumptions for price inflation and general wage growth, which reduced the probability that CalSTRS would achieve its 7.5 percent return to 50 percent over the long-term, according to the report.

Across the country, public pension funds have been steadily decreasing their expectations for investment returns from an 8 percent median discount rate in 2010 to 7.5 percent today, according to the National Association of State Retirement Administrators.

CalSTRS's sister fund, the California Public Employees' Retirement System (CalPERS) in December lowered its expected rate of investment return from 7.5 percent to 7 percent by 2020, citing lower market growth forecasts over the next decade.

CalSTRS must also take into account improvements in beneficiaries' life expectancies, the report noted.

Under the proposed changes, CalSTRS's funding ratio would drop to 63.9 percent from 67.2 percent, and contribution rates would rise.

CalSTRS estimates that under a 7.25 percent expected return, the state contribution rate would increase by 0.5 percent of payroll for each of the next five years. Currently, the state contribution rate is 8.8 percent of payroll.

Labor unions and other supporters of traditional defined-benefit pensions tout the oftentimes generous and guaranteed nature of pensions, but many — and sometimes even most — do not come out ahead.

This is particularly true for California teachers, according to a recent University of Arkansas study. In fact, the authors estimate that fully two-thirds of all teachers in the California State Teachers’ Retirement System will be “pension losers” because either they will be among the 40 percent of new teachers who leave before they satisfy CalSTRS’ five-year vesting period, and thus receive no pension, or the value of their pension will be less than what they contributed to the system. A teacher who starts her career at age 25, for example, will have to work until age 53 before merely breaking even with her employer’s pension contributions, the study concludes.

“Under traditional defined-benefit plans, employees and employers make contributions of a given percentage of pay, but those contributions are an average of widely varying individual costs to fund the retirement system,” the authors note. Those costs vary greatly based on how old teachers are when they start working and how many years they end up working.

“With benefits de-linked from contributions, some individuals will receive benefits that cost more than the contributions made on their behalf and some will receive less, effectively a system characterized by cross-subsidies,” they explain.

In other words, those who remain in the system for a very long time are significantly subsidized by newer — and even many not-so-new — teachers.

This is in stark contrast to 401(k)-style defined-contribution plans or cash balance plans, a hybrid that has elements of both defined-benefit and defined-contribution plans. “Under such plans, there would be no cross-subsidies,” the authors observe.

There is also the matter of how financially sound CalSTRS actually is. Under current assumptions, the system is only about 69 percent funded. The CalSTRS board will meet this week to consider reducing the pension fund’s annual investment rate of return assumption from 7.5 percent to 7 percent.

The proposal was prompted by a report from the pension system’s actuary, Milliman Inc., which counseled that keeping the 7.5 percent rate “is not recommended since the probability of achieving this return is less than 50 percent.” It would follow CalPERS’ decision last month to reduce its return rate assumption from 7.5 percent to 7 percent over three years, and would be the third reduction for CalSTRS since 2010, when the rate was as high as 8 percent.

Critics have long argued that such assumptions were unreasonable, and led to smaller government pension contributions that shortchanged the system because they were inadequate to cover future liabilities. The move would require the state to sock away an additional $153 million next fiscal year, and the approximately 80,000 teachers hired since the Public Employees’ Pension Reform Act went into effect in 2013 would have to contribute approximately $200 more per year.

In light of the pension subsidies paid by all but the most seasoned teachers and the financial difficulties experienced by CalSTRS’ defined-benefit system, it would be better for teachers and taxpayers alike to switch to a reasonable defined-contribution or cash balance plan instead.

OPTrust today released Climate Change: Delivering on Disclosure, a position paper that details the fund’s approach to navigating the complexities of climate change with respect to institutional investing and includes a call for collaboration in the development of standardized measures for carbon disclosure.  The position paper is accompanied by a report by Mercer titled OPTrust: Portfolio Climate Risk Assessment which provides an assessment and analysis of the organization’s climate risk exposure across the total fund.

"Climate change impacts, and policy responses to these, will undoubtedly have repercussions on capital markets and our investment portfolio. While these impacts continue to grow, the investment industry has yet to develop a common approach to measure, model and mitigate these risks," said OPTrust President and CEO Hugh O'Reilly. "We have been active in the conversation around climate change, and now is the time to take the next step. It is our intent in sharing these documents to engage in further dialogue with our partners and peers on developing these measures."

OPTrust's approach to climate change is rooted in its investment beliefs and strategy, which recognize that environmental, social and governance (ESG) factors will impact the fund's investment risk and return, decades in the future. For pension funds, climate change presents a number of complex and long-term risks. In Canada alone, pension funds manage well over $1.5 trillion in assets, which brings a real responsibility to collectively seek innovative approaches to modeling carbon exposure and its impact across portfolios.

The position paper and the Mercer report are available at optrust.com.

With assets of $18.4 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 87,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets, through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

[..] to all those tree-hugging, vegetarian environmentalists from British Columbia fighting for social justice in their Birkenstock sandals, it's time to grow up and realize that the world is a sewer and if you push responsible investing to its limits, the first companies you should divest from are big banks speculating on commodity and food prices. How come you're not hopping mad about pensions gambling on hunger? I'm way more concerned about banksters engaging in financial speculation than tobacco and arms-producing companies.

The reality is that once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including Big Pharma which some claim thrives on perpetual sickness and slavery, as well as everyone's beloved Apple whose Chinese mega-plant, Foxconn, admits having child laborers in its factories.

Another example is the coal industry, which Harvard students demanded its endowment divest from. I said this was a dumb idea and note that with China and India ravenous for energy, coal’s future seems assured (take it from someone who got scorched last year investing in environmentally friendly Chinese solars!!!).

I'd much rather see large pension funds and sovereign wealth funds invest in these companies and use their clout to bring about important change, ensuring that labor, health, environmental and governance standards are respected while they deliver on performance.

Japan's Nikkei reports, Japan's pension megafund to invest in US infrastructure:

Infrastructure investments in the U.S. by Japan's Government Pension Investment Fund will feature heavily in the economic cooperation package to be discussed at next week's summit in Washington between the two countries' leaders.

The goal is to create hundreds of thousands of American jobs, in keeping with U.S. President Donald Trump's agenda, and deepen ties between the two countries.

New cabinet-level talks discussing trade policies and economic cooperation agreements are also on the table. Japan's contingent would likely include Finance Minister Taro Aso, Economic Minister Hiroshige Seko, and Foreign Minister Fumio Kishida. The U.S. is expected to send incoming Commerce Secretary Wilbur Ross and incoming U.S. Trade Representative Robert Lighthizer to that meeting. Japanese Prime Minister Shinzo Abe and Trump will aim for agreement on that framework during their Feb. 10 meeting.

"I wish to discuss [Japanese] contributions toward improved productivity and competitiveness in the entire U.S. industrial sector, or a large framework that includes aid for infrastructure development," Abe told members of the lower house Wednesday. His government has started to lay out a comprehensive initiative addressing job growth.

The draft proposal will feature infrastructure investments in the U.S. by Japan, joint robotics and artificial intelligence research by the two sides, and countermeasures against cyber attacks.

The GPIF will purchase debt issued by American corporations to finance infrastructure projects. Up to 5% of the roughly 130 trillion yen ($1.14 trillion) in assets controlled by the megafund can go toward overseas infrastructure projects. Currently, only tens of billions of yen are invested in that asset class, leaving room for expansion. Long-term financing for high-speed rail projects in Texas and California would be provided through such avenues as the Japan Bank for International Cooperation.

In the area of research and development, Japan aims for joint development of medical and nursing care robots. Robots will also help boost efficiency in inspections of America's aging infrastructure. Japan is considering joint research in decommissioning nuclear reactors.

I give credit to Zero Hedge for bringing this up to my attention, adding their own analysis as to why Japan's pension whale is investing in US infrastructure (underlined emphasis is mine):

Having decided to actively increase its risk exposure over the past few years, including venturing into high beta stocks and junk bonds - a gamble that has lead to a big jump in quarterly volatility not to mention significant downside risk should global markets suffer a crash - Japan's Government Pension Investment Fund, or GPIF, the world's largest pension fund, has decided to invest in US infrastructure projects next.

According to Japan's Nikkei, infrastructure investments in the U.S. by Japan's GPIF will feature heavily in the economic cooperation package to be discussed at next week's summit in Washington between the two countries' leaders. The stated goal is to create "hundreds of thousands of American jobs", in keeping with U.S. President Donald Trump's agenda, and deepen ties between the two countries. The unstated goal is to avoid Trump lashing out at Japan as a currency manipulator, and putting in peril Japan's QQE "with curve control" experiment, which is the bedrock of all Abenomics (as further expained in the following Nikkei piece).
Japan has grown nervous that after Mexico, China and Germany, it may be next nation to find itself in Trump's spotlight, something Trump hinted at yesterday during his meeting with pharma CEOs when he said that "other countries take advantage of America by devaluation," and then directly named China and Japan as "planning money markets," presumably implying manipulation.

As such, Japan's prime minister may be simply offering up billions in pension fund capital as a source of capital for the upcoming Trump infrastructure projects to placate the president and avoid a far more dire outcome, should Trump launch currency or trade war with Japan. Whatever the logic behind Abe's thinking, new cabinet-level talks discussing trade policies and economic cooperation agreements are also on the table.

Japan's contingent headed to the US would likely include Finance Minister Taro Aso, Economic Minister Hiroshige Seko, and Foreign Minister Fumio Kishida, the Nikkei reported. The U.S. is expected to send incoming Commerce Secretary Wilbur Ross and incoming U.S. Trade Representative Robert Lighthizer to that meeting. Japanese Prime Minister Shinzo Abe and Trump will aim for agreement on that framework during their Feb. 10 meeting.

"I wish to discuss [Japanese] contributions toward improved productivity and competitiveness in the entire U.S. industrial sector, or a large framework that includes aid for infrastructure development," Abe told members of the lower house Wednesday. His government has started to lay out a comprehensive initiative addressing job growth.

The draft proposal will feature infrastructure investments in the U.S. by Japan, joint robotics and artificial intelligence research by the two sides, and countermeasures against cyberattacks.

How will the Japanese megafund alllocate pension capital? According to the Nikkei, the GPIF will purchase debt - using the funds of retired Japanese citizens - issued by American corporations to finance infrastructure projects. Up to 5% of the roughly 130 trillion yen ($1.14 trillion) in assets controlled by the megafund can go toward overseas infrastructure projects. Currently, only tens of billions of yen are invested in that asset class, leaving room for expansion. Additionally, long-term financing for high-speed rail projects in Texas and California would be provided through such avenues as the Japan Bank for International Cooperation.

While we doubt Japanese pensioners are aware that the returns on public infrastrcuture are some of the lowest in the world, if not outright negative, we are confident they will learn soon enough, although since the full IRR will become evident only over a period of years, they may have bigger concerns should the Nikkei and/or global stock markets, where the GPIF is now heavily invested, crash first.

Angling to pre-empt complaints over Japan's perennial trade surplus with the U.S., Prime Minister Shinzo Abe reportedly plans to propose a sweeping economic cooperation initiative meant to create hundreds of thousands of jobs in the U.S. when he meets with President Donald Trump later this month.

Abe and Trump are expected to meet on Feb. 10. Major Japanese newspapers cited a draft of the proposal that calls for cooperation on building high-speed trains in the U.S. northeast, Texas and California. Japan would share technology on artificial intelligence, robotics, small-scale nuclear power plants, space and Internet technology.

The reports Thursday said the proposed public-private initiative would create several hundred thousand jobs, reports said, and involve $450 billion in new investment.

The government pension fund may invest in the projects, the reports said.

Asked about the reported package, Chief Cabinet Secretary Yoshihide Suga told reporters Tuesday that nothing definitive has been decided for talks between the two leaders.

"We hope to have constructive talks in order to seek how we can forge a mutually win-win relationship," Suga said. He did not deny the report, but only added that any decision on involvement by the Government Pension Investment Fund would be based on whether it would benefit those covered by the fund.

Other officials did not immediately respond to questions on details of the proposed package.

One area which Trump is definitely committed to is spending on infrastructure. Jim Cramer of CNBC said this morning he sees the Treasury department emitting new 30-year bonds to cover the trillion dollar spending program Trump has outlined to revamp airports, roads, bridges and ports.

Here, I will refer the Trump administration to what the Canadian federal government is doing, setting up a new infrastructure bank, allowing Canada's large pensions and other large global investors, to invest in large greenfield infrastructure projects.

I discussed this new initiative and what Canada's large pensions are looking for in a recent comment where I also shared insights at the end in an update from Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers' Pension Plan.

Why am I mentioning this? Because if Trump's administration is really committed to "making America great again" and spending a trillion or more on infrastructure, they will need a plan, a blueprint and they definitely should talk to the leaders of Canada's large pensions, widely considered to be among the best infrastructure investors in the world.

There is another reason why I mention this. The US has a huge pension problem as many public sector pensions are chronically underfunded. There is a growing appetite for infrastructure assets around the world, including in the United States where large public pensions are looking to increase their allocations.

If a Trump administration sets up the right program on infrastructure, modeled after the Canadian one, and establishes the right governance, it will be able to attract capital from US public pensions starving for yield as well as that from Canadian and global pensions and sovereign wealth funds which would welcome such a program as it fits perfectly with their commitment to infrastructure as an asset class.

The big advantage of integrating US and global pensions as part of the solution to rebuilding America's infrastructure is that it will limit the amount the US needs to borrow and will make this ambitious infrastructure program more palatable to deficit hawks like Paul Ryan (who might not be the speaker of the House come January).

And if it's done right, it will allow many US public pensions to invest massively in domestic infrastructure, allowing them to collect stable cash flows over the long run, helping them meet their mounting future liabilities. The same goes for Canadian and global pensions which would also invest in big US infrastructure provided the governance is right.

Want more proof that the quants are taking over the world? Take a gander at this chart of the world’s top 10 hedge-fund managers released Wednesday by London-based LCH Investments (click on image below).

LCH’s annual update on long-term fund performance is eagerly awaited. For 2016, the firm, which bills itself as the world’s oldest fund-of-fund investor, made an important change, including for the first time several managers that depend partly or completely on a “systems-based” investment approach—think computers and quantitative models.

With the change, D.E. Shaw & Co. made its debut in third place on the table, behind Ray Dalio’s Bridgewater Associates and George Soros’s Soros Fund Management. The table measures net gains since inception through the end of last year.

D.E. Shaw, founded by computer scientist David E. Shaw, is one of the pioneers of quant-based investing. So is Ken Griffin’s Citadel, which enters the list at No. 5. Shaw, which saw a net gain after fees of $1.2 billion in 2016 has accumulated net gains $25.3 billion since its inception in 1988. Citadel, founded two years later, saw a gain of $1 billion in 2016 and is up $25.2 billion since its inception, according to LCH’s estimates.

And all-time champ Bridgewater, while not a newcomer to the list, is famous in part for the role that systems-based trading plays in its Pure Alpha Fund. Not on the table above, but coming in at No. 20 in LCH’s estimates, is Two Sigma Investments, a systems-based fund founded in 2001 by former D.E. Shaw employees David Siegel and John Overdeck.

“The increasing capabilities of technology-based investment systems is in evidence in these results. These systems are being used by many of the most successful investment firms to provide alternative data sources, processed investment analysis and artificial intelligence,” said Rick Sopher, chairman of LCH Investments.

Of the top 20 firms, LCH estimates that D.E. Shaw, Citadel, Bridgewater and Two Sigma have accounted for $90 billion of net gains for investors over the last 10 years—a whopping 28.2% of the $319.2 billion total.

All that said, the overall returns produced by hedge-fund managers in 2016 were a disappointment, Sopher said. “Even the managers with the best long-term records did not perform strongly and their results were no better than average,” he said.

The top 20 managers generated a total of $16.1 billion in gains after fees in 2016. On a weighted basis, they produced a return of 2.6%. The S&P 500 SPX, +0.06% returned 11.9% in 2016, including dividends.

That’s in line with the general perception of 2016 as a particularly dark year for the hedge-fund industry as institutional investors and others continued to balk at the industry’s high fee structure and carp about lackluster performance amid a broader shift to passive investing.

It was a tough year for some high-profile managers. Paulson & Co., ran by billionaire John Paulson, who became famous for his lucrative bet against the housing market ahead of the financial crisis, saw a $3 billion loss in 2016, LCH estimated, reducing its accumulated net gain since inception to $18.4 billion and dropping it to No. 13 on the all-time list from No. 7 a year ago.

But it isn’t all doom and gloom. Sopher noted that while 2016 was a difficult year for all active managers, results improved sharply toward the end of the year. “This, combined with the continuing trend to lower fees, should improve the prospects for hedge-fund managers to generate strong, positive returns after fees for their investors,” he said.

Top hedge funds that use computers and quantitative models to trade financial markets have generated $113 billion in net gains over the years, making up a quarter of the total amount of net gains produced by the top 20 hedge funds in history.

That’s what LCH Investments’ annual survey of the top 20 hedge fund managers shows, which for the first time includes data from some hedge funds that use systems-based investment approaches.

According to LCH Investments, four of the top 20 hedge funds that have generated the highest amounts of net returns are highly reliant on algorithmic trading. Those hedge funds include billionaire Ray Dalio’s Bridgewater Associates, which has produced $49.4 billion in net gains since inception, more than any other hedge fund.

LCH has long included Bridgewater on its top 20 hedge fund managers list, but this year for the first time the list also includes three major hedge funds known for their computer and data-driven approaches to investing. DE Shaw, the quant firm founded by billionaire David Shaw, lands in the third spot with $25.3 billion in net gains. Billionaire Ken Griffin’s Citadel, which also uses systems-based approaches, is fifth with $25.2 billion in net gains. Two Sigma Investments, the quant firm run by billionaires John Overdeck and David Siegel, are in the 20th spot of top hedge funds with $13.1 billion in net gains.

In an interview Rick Sopher, chairman of fund of hedge funds LCH, said it has become impossible to ignore the impact that computer-driven investing is having in the hedge fund world and that many traditional hedge fund managers are now adopting some algorithmic methods. Hedge funds are increasingly using big data and machine learning in their quantitative trading.

To be sure, LCH’s hedge fund list understates the success and influence of the quants. For example, LCH was unable to get good enough data to include on its list billionaire James Simons’ Renaissance Technologies, the top quantitative hedge fund ever, which no doubt has generated the kind of net gains that would place it near the top. But the bulk of Renaissance’s gains have been generated by the secretive Medallion fund, for which good data is hard to come by.

In addition some of the hedge funds that LCH does not include as funds that use systems-based approaches have sizeable quantitative businesses. For example, billionaire Israel Englander’s Millennium Management includes a $4 billion quantitative trading arm called WorldQuant. Other firms on the list, like billionaire Paul Tudor Jones’ hedge fund, are ramping up their computer and data capabilities to compete. The line between man and machine are blurring in the hedge fund world.

“The increasing capabilities of technology based investment systems is in evidence,” Sopher said in a statement. “The new entrants in the top 20 are all investment firms which depend partly or wholly on such approaches, reflecting this powerful and continuing trend in money management.”

Judging by the way hedge funds have been betting on Wall Street, they see U.S. stock market volatility remaining low, but it may not be that simple.

CBOE Volatility Index (VIX) futures contracts allow a play on implied volatility in stock prices and can provide a hedge on equity returns, but big speculators are currently net short 114,088 contracts in VIX futures, just under the record level set earlier this month, according to U.S. Commodity Futures Trading Commission positioning data through August 16.

After trading in a range for most of the past year, U.S. stock prices recently broke out to record highs and hedge funds have reluctantly bought into the rally. Their net long/short exposure has increased to 22.8 percent, a top quartile level, but still shy of the 5-year peak of 24.5 percent set last December, according to Credit Suisse data.

On the face of it, the CFTC data could be seen as evidence that speculators strongly believe in the lasting power of the recent rally in equities and expect the CBOE Volatility Index .VIX, which is near historic lows, will remain subdued.

"That's not exactly right," said Maneesh Deshpande, head of equity derivatives strategy at Barclays.

Deshpande and other derivatives market experts say speculators are to a large extent just selling VIX futures to the issuers of exchange-traded products (ETPs) who need protection against volatility.

With the S&P 500 stock index .SPX near a record high, demand for these is quite strong.

For instance, money flows into the iPath S&P 500 VIX Short-Term Futures ETN (VXX), the most heavily traded long volatility ETP, are the strongest in three years, according to data from Lipper. In turn, that's creating steady demand for VIX futures that the hedge funds are only too happy to supply.

"Strong inflows into long VIX ETPs means the issuers of these products have to go and buy VIX futures," Rocky Fishman, equity derivatives strategist at Deutsche Bank.

Even in the absence of those inflows, the way these ETP products work means that as market volatility declines it requires these product issuers to buy more VIX futures contracts.

It is in response to this strong demand for VIX futures that speculators have ramped up the selling of VIX futures. Essentially, these funds are acting as liquidity providers, not making outright bets.

Robert Mercer, the co-chief executive of Renaissance Technologies, played a big role helping Donald Trump win the White House last year, but his efforts did not distract the world’s most elite hedge fund firm from making profits in financial markets.

Renaissance Technologies’ biggest hedge fund, the $15 billion Renaissance Institutional Equities fund, was up 21.5% net of fees in 2016. Another large Renaissance hedge fund that consists of money from outside investors, Renaissance Institutional Diversified Alpha, was up 10.7% last year.

The good performance at Renaissance Technologies, which specializes in quantitative trading and models, comes amid general struggles in the rich hedge fund industry, where the average hedge fund manager, according to HFR, gained 5.6% in 2016. It was yet another year in which the hedge fund industry significantly trailed the return of the U.S. stock market. A new and relatively small Renaissance hedge fund, the Renaissance Institutional Diversified Global Equities fund, returned 1.7% last year.

Founded by billionaire James Simons, Renaissance Technologies has consistently outperformed the entire hedge fund world for decades, particularly with its secretive Medallion fund, which has for years been a proprietary strategy that has not been open to outside investors. Medallion reportedly posted returns of 21% in the first half of 2016, according to a Bloomberg News report. With the strong returns and new investor money rushing into the firm last year, Renaissance Technologies now manages about $36 billion.

But 2016 was not your average year at Renaissance. The secretive hedge fund firm based on New York’s Long Island attracted a lot of attention because of Mercer’s support for Trump. Mercer financially backed his daughter’s Trump super political action committee and Rebekah Mercer hopped on the Trump transition team’s executive committee. Mercer also has long-standing ties to two key members of the Trump Administration, Stephen Bannon and Kellyanne Conway.

Mercer’s political work has stood in sharp contract to Simons’ political activities. Simons has traditionally been a big supporter of Democratic candidates and backed Hillary Clinton’s White House run in a big way in 2016. Mercer’s co-CEO at Renaissance, Peter Brown, also leans Democratic—his wife, Margaret Hamburg, held positions in the Clinton and Obama administrations, including head of the Food & Drug Administration. Mercer and Brown have been co-CEOs at Renaissance since Simons retired a few years ago and their working relationship has produced excellent results for a long time.

Indeed, Simons’ biggest concern ultimately may be that the outside activities of his top executives not detract or hurt the incredible business he built. Renaissance Technologies has led the quantitative trading revolution that has swept Wall Street and at the moment that business seems to be humming.

A spokesman for Soros confirmed the hire. Bloomberg earlier reported the news.

Fitzpatrick replaces Ted Burdick, who left the position last fall but remained at the firm. While her start date is unclear, Fitzpatrick would be Soros' seventh CIO at Soros Fund Management since 2000.

At UBS, Fitzpatrick oversaw more than 500 billion Swiss francs across investment teams, according to her UBS bio. She previously was the head and CIO of a multibillion-dollar hedge fund owned by UBS. Fitzpatrick started her career in 1992 with O'Connor & Associates as a clerk on the American Stock Exchange.

On a recent rainy October evening, Peter Muller, 52, sits at a piano on the stage of Manhattan's City Winery, playing with the band from his third album, Two Truths and a Lie. In between songs about love, heartbreak and relationships, like his Bruce Hornsby-reminiscent "Kindred Soul," Muller describes the long, strange trip he has taken in and out of high finance.

The tieless suits in attendance, from places like Goldman Sachs and Blackstone, paid as much as $1,000 a ticket to raise nearly $55,000 for the Robin Hood Foundation. And while Muller tells them of his early discovery of music, the existential crisis of his 30s, buddies he left behind in California and his family, there is a sense that many in the room just want to be in the orbit of the hottest hedge fund manager on Wall Street today. "I know you all had your choice of hedge fund manager CD-release parties," quips Muller. "Thank you for choosing ours."

Pete Muller is the latest, greatest member of a growing band of hedge funds that use complex math and computer-automated algorithmic models to buy and sell stocks, futures and currencies based on statistical correlations and aberrations that can be found in the market. During 2015, when many hedge fund managers--from mighty activists like Bill Ackman to noted short-sellers like David Einhorn--lost money, Muller spun the market's volatility into gold. The largest fund of his three-year-old PDT Partners firm, which oversees $4.5 billion, was up 21.5% net of fees in the first 11 months of 2015.

"We knew that Pete has a magic touch," says J. Tomilson Hill, the billionaire who runs Blackstone's $70 billion hedge fund investment unit. "I happen to be a big fan of Cézanne, and Pete is in his own way as gifted as Cézanne was." Paul Tudor Jones, the billionaire hedge fund manager, adds: "He is up there with the best and brightest--bar none."

Indeed, Muller's fund is so coveted that even Wall Street's power elite are willing to effectively grovel to get in on PDT's action. Many hedge funds stipulate that limited partners remain "locked up," or prevented from redeeming funds, for a predetermined period, usually one year. PDT is the opposite. Its biggest investor, Blackstone, actually agreed to be locked up for no less than seven years--in return for Muller's assurance that he would not kick it out of his biggest fund for the same period of time. Others requested the same lockup restrictions--and were refused. Even more astonishing is Muller's 3% of assets under management fee, and performance fees that rise to 50% of profits for benchmark-beating performance, compared with the already maligned industry standard of 2-and-20.

"Our goal is to be the best quantitative investment firm on the planet, but not in terms of number of assets, in terms of quality of the products," says Muller in his first interview since opening his new firm. "To take money out of the market with as little risk as possible and build a place people who are smart are drawn to." Muller's niche formula has also let him take plenty of money out of the market personally: Forbes estimates that in the last three years alone he's made $200 million before taxes, including gains on his own capital.

It's mid-November 2015, the U.S. stock market has given back all of its gains, and hedge fund managers around the globe are wringing their hands in anticipation of sending out another batch of disappointing investor letters. Muller is sitting in his Manhattan office. He is wearing a gray sweatshirt and jeans and has a Zen-like calm. His research chief has just left his office after telling Muller about a promising finding that could lead to the improvement of one of PDT's main models. "When people buy or sell in a desperate or hurried fashion, it tends to be helpful to us," says Muller, who is otherwise tight-lipped about what has gone right this year.

There are two screens in Muller's office: a flat-panel display on his desk showing the movement of his hedge fund's positions and a much larger screen on the wall that displays a real-time high-definition stream of the surfing beach at the foot of his house just north of Santa Barbara, Calif. When he's at PDT's headquarters in New York City and the waves are big, Muller sometimes yearns to be hanging ten. Luckily this doesn't happen too often, because Muller spends two-thirds of his time at his California home, where responding to "surf's up" is a regular ritual.

Muller may not appear to be a workaholic like many other Wall Street titans, but he is obsessive about his algorithms and problem solving, and he can get lost in deep thoughts for hours, days. His fear of burnout is real--he already dropped out of Wall Street once in 1999--and diversions like music and surfing are almost a necessity.

Muller grew up in suburban Wayne, N.J. His father was an electrical engineer and his mother a psychiatrist. He was good at numbers and loved music. At Princeton he studied math and played in a jazz band. After graduating, he headed to northern California to play music for rhythmic gymnasts and, figuring he had to pay the bills, eventually went to work for BARRA, a pioneering research firm that catered to quantitative financial firms. In 1992 he joined Morgan Stanley in New York as a proprietary trader to see if he could use math and computers to trade himself. Some of his investment banking colleagues were skeptical about the new math guy in the office. He called his group Process Driven Trading, or PDT. "I wanted to win and prove myself," Muller says.

Nobody outside the bank knew it, but for a long time Muller was Morgan Stanley's supersecret weapon, making big contributions to its earnings each year, hidden in the firm's income statement under "principal transactions."

Muller was able to carve out his own quiet area at Morgan Stanley's Manhattan headquarters, where his team of math nerds could dress casually away from the bank's testosterone-fueled, high-octane trading hordes. Muller became intensely focused on figuring out patterns that could help him beat the market. It was thrilling and exhausting. He thought and talked about it all the time--couldn't even sit through a Broadway show without stressing over it. "He is really smart, but a lot of smart people get lost in theory," says Kim Elsesser, a computer programmer and mathematician from MIT, and Muller's first key hire. "He also has very high expectations of himself and other people."

As Muller gained success and autonomy at Morgan Stanley his behavior became somewhat erratic. He detached from the office at a second home in Westport, Conn. in part because the pressures of work were overwhelming. His mind became so overloaded with mathematical formulas that he could no longer play music. Crossword puzzles became an escapist obsession; he even created them for the New York Times. By 1999 Muller started to feel like he could no longer find happiness on Wall Street.

"I was out of balance personally," Muller says. He went on sabbatical, rediscovering his love of music partly by busking in New York subway stations and sojourning in far-off places like Bhutan. After returning in 2000 he spent the next several years essentially as an advisor to the fund he created, PDT. Muller today likens it to a kind of executive chairman position that left him time to do other things, such as practice yoga and produce two music albums with titles like Just One Lifetime. He also met his wife, Jillian.

The soul-searching lasted about seven years, and Muller says it sent his trading operation into a period of stagnation. Muller then rolled up his sleeves and came back full-time to PDT in 2006. Unfortunately his return just about coincided with the quant meltdown of 2007, when the precipitate drop in subprime mortgage securities triggered deep losses for many firms. Under pressure from Morgan Stanley, Muller was forced to liquidate part of his portfolio. "Morgan Stanley Star Is Among Those Battered; No Time for Music Now," the Wall Street Journal 's front page blared.

As with many on Wall Street, the financial crisis changed the game for Muller. He had produced the kind of returns that would have made him a billionaire had he been an independent hedge fund manager. But working for Morgan Stanley always appealed because he didn't have to worry about raising cash, appeasing clients or back-office details. It was plug and play. He couldn't invest his own money in PDT, but he was well-paid, receiving a cut of his unit's profits, and could singularly focus on solving market puzzles.

There was also the tricky issue of the intellectual property Muller developed but Morgan Stanley owned. But 2008 exposed the danger of being dependent on one client, namely Morgan Stanley. It also gave birth to the Volcker Rule, a piece of legislation designed to make it impossible for a proprietary trader like Muller to work at a bank like Morgan Stanley. Over the next few years Muller engaged in on-again, off-again negotiations with the Wall Street firm about their operating arrangement.

"We preferred to stay together, but as the Volcker Rule emerged it became clear that would not be permitted," says Jim Rosenthal, Morgan Stanley's chief operating officer, who led the last round of negotiations with Muller. "Sadly, this was a business that was a steady source of revenue and profitability and did not pose significant risks to the firm."

In the end Muller would manage Morgan Stanley money until the end of 2012 and control the intellectual property Morgan Stanley was no longer permitted to use. Under the terms of the deal Morgan Stanley would get a cut of the fee revenue of the new, independent PDT for an undisclosed period of time.

On New Year's eve 2012 Muller transferred all of his group's investment positions from Morgan Stanley to PDT Partners. It wasn't only the positions and intellectual property that came with him--so did every single member of his 80-person staff. Invigorated, Muller went to work, increasing his new business and nearly doubling his employees.

"It feels great to have your own place," says Muller from his office on the top floor

of a midtown Manhattan building formerly occupied by Random House. "I never felt like I had to have my name on the door, but I didn't own it before, and in hindsight I didn't recognize the psychological impact of that."

In order to make his mathletes more comfortable Muller has had special glass walls constructed that are slightly curved to deflect sound and maintain the quiet workplace needed for concentration. Outside those quiet areas there are Ping-Pong and foosball tables near the kitchen and meeting rooms with whiteboards covered with mathematical formulas. Employees never wear suits; they run book clubs and organize poker nights that Muller sometimes attends. (He has made a final table at the World Series of Poker.)

Not much is known about Muller's black box models. He traded using two different strategies at Morgan Stanley that have morphed into the two hedge funds he now runs. The PDT Partners Fund is a statistical arbitrage fund built on models that have never had a down year. The $3 billion fund was up 21.5% in the first 11 months of 2015, and given its high fees, its gross returns were running at about 40%. Since inception in 2013 PDT Partners Fund has produced annualized net returns of 18.5%. Another fund, $1.5 billion Mosaic, has a longer time horizon and had produced returns of 10.5% net of fees through November of last year and 8.5% annualized in three years. PDT also has a Fusion Fund, which allocates cash between PDT Partners and Mosaic.

Returns like that are beginning to rival the long-reigning king of quants, Renaissance Technologies, known for market-defying consistency and for producing a net worth of $14 billion for its professorial founder, James Simons. While Muller is not yet even a billionaire, some say he is the new Simons.

Like Renaissance PDT is a Ph.D. farm, with 35 researchers who spend most of their days developing trading algorithms. They are organized into five teams by the asset class and time horizons they work on. Some work on futures contracts with longer holding horizons while others toil with statistical arbitrage strategies that trade stocks over a medium time horizon of several weeks. Most efforts to come up with new models tend to start with two-week-long deep dives but can grow into research projects that last a year. PDT has one open problem today that its people have worked on for four years.

And while most Wall Street research analysts expect their best ideas to find their way into firm portfolios within weeks or months, PDT takes an academic approach to portfolio change. Researchers know that their models may not affect returns for two years or more. In fact, PDT is still using models today with concepts that were initially developed 15 years ago, but models do decay over time and need to evolve with the market. "We are more intent in building a group of Ferraris than a bunch of Toyotas," says Tushar Shah, research chief at PDT.

Finding the right minds for Muller's model-making is almost as hard as decoding statistical arbitrages hidden in markets. Big data and sheer computing power have become a driving force in PDT's business model. Like other quants, PDT routinely competes with tech firms for leading programmers and mathematicians. It is now hiring more computer engineers than mathematician-researchers. Experts in machine learning are in high demand, so poaching talent from the likes of Google and Microsoft has become popular of late.

It's not always the eye-popping first-year salaries of several hundreds of thousands of dollars that hook new Ph.D. recruits. PDT researcher John Sun, 30, was finishing up an MIT Ph.D. in electrical engineering and computer science when he got an e-mail from Eunice Baek, Muller's longtime partner who manages recruiting. Sun would frequently get these sorts of e-mails and ignore them, but this one pulled him in. It said people at PDT like Lord of the Rings, science fiction and board games such as Settlers of Catan.

Like most PDT job candidates, Sun was flown to New York for a 36-hour interview on the second Saturday of November at PDT headquarters, where Muller and his partners tried to determine if Sun had the smarts and was someone with whom they could spend a lot of time. The guts of the recruiting weekend include a modeling interview and then collaborative algorithmic-based problem-solving games in which candidates are separated into small teams that Muller watches closely. PDT has a 3.5% turnover rate, and while the hours are not grueling, the work is demanding--trying to solve stock market puzzles often ends in failure.

"I want their shower time because in the shower they are thinking about things that get them to solve the problems," says Muller.

While Muller is supersecretive about the details of his models even to limited partners, who seem to invest on faith--he is adamant that PDT does not engage in ultra-high-frequency trading. Ferreting out small market inefficiencies is core to PDT's strategy, and what is also clear is that, for Muller, the more trading going on in markets the better. "There is a limitation on how much volume we can trade naturally built into our systems," Muller says, adding he will almost certainly return some capital to his investors at the end of 2015, as he did in 2014. Trust in Muller's machines is paramount, and he rarely intervenes manually, even when jarring upheavals temporarily defy his model's predictions.

Spending seven months of the year with a surfboard at the ready or composing in front of a keyboard, instead of obsessively staring at a CNBC ticker, probably gives Muller's PDT an advantage. Instantaneous information and constant volatility are the new reality of global markets. Whether it is index investing or robo-advisors, the discipline and brainpower of machines are winning on Wall Street. The rise of the quants is just beginning. "It will get harder, but we are prepared, and as information becomes more widely available and computing power increases, the strength of our models will improve," Muller says. "Quantitative investing is the best way to manage money, period."

Hayfin Capital Management LLP, a European private debt investment firm, has agreed to be acquired by British Columbia Investment Management Corp (bcIMC). No financial terms were disclosed, however, Sky News reported the deal’s value to be about £215 million (US$268 million). The Canadian pension fund bought a majority stake in Hayfin from the company’s founding shareholders: TowerBrook Capital Partners, PSP Investments, Ontario Municipal Employees Retirement System (OMERS) and Future Fund. London-based Hayfin, established in 2009, said bcIMC will commit “significant capital” to its managed funds and support its long-term growth.

PRESS RELEASE

Hayfin’s institutional shareholding sold to bcIMC

January 31st 2017

Hayfin Capital Management LLP (“Hayfin” or “the firm”), a leading European credit platform with €8.2bn in assets under management, today announces that British Columbia Investment Management Corporation (“bcIMC”) has agreed to acquire the majority shareholding in the firm from the existing consortium of institutional shareholders. The transaction will support Hayfin’s long-term growth plans and simplify its ownership structure, with Hayfin’s management and employees remaining substantive shareholders alongside bcIMC.

bcIMC, a Canadian investment manager which manages approximately C$122bn in assets, is acquiring 100% of the shares owned by Hayfin’s current institutional shareholders – TowerBrook Capital Partners, PSP Investments (“PSP”), the Ontario Municipal Employees Retirement System (“OMERS”), and The Future Fund. bcIMC is also committing significant capital to the funds that Hayfin currently manages and will be supportive of the future development of the business. Hayfin’s principal focus will remain managing assets for third parties; the day-to-day independence of the Hayfin team over operations, investments, and personnel will be unaffected by the change in ownership.

Tim Flynn, CEO of Hayfin Capital Management, commented: “This long-term investment from bcIMC will provide the access to capital and streamlined ownership structure to realise our ambition of becoming Europe’s leading credit platform. What won’t change under the new ownership arrangements is the independence of Hayfin’s experienced team of credit investment professionals, or our commitment to delivering high-quality returns for the third-party investors whose capital we manage.”

Jim Pittman, Senior Vice President of Private Equity at bcIMC stated: “We see this as a strategic long-term investment in a leading company that has the potential to generate value-added returns for our clients. Having known the Hayfin team since inception, I’m confident in their strategy and ability to further expand their business and raise additional capital through their funds.” He continued, “Our investment in Hayfin provides bcIMC with access to one of Europe’s leading credit platforms as both a majority shareholder and an investor in its funds across the spectrum of credit products.”

The financial terms of the deal are undisclosed. Completion of the transaction is subject to regulatory approval.

A giant Canadian pension fund will this week swoop to take control of a UK-based lender which counts The Racing Post and ‎Quorn, the meat substitute food manufacturer, among its clients.

Sky News has learnt that the British Columbia Investment Management Corporation (BCIMC) will announce on Tuesday that it has agreed to buy a majority stake in Hayfin Capital Management in a deal worth roughly £215m.

The deal will underline a growing appetite to invest in alternative lenders, many of which have been established over the last decade to exploit gaps left by traditional banks.

A regulatory clampdown after the 2008 financial crisis has made it harder for conventional banks to lend to companies on economically attractive terms‎, paving the way for the emergence of competitors such as Hayfin and Ares Capital Management.

Sources said that BCIMC, which manages more than C$120bn (£73.2bn) of assets, would buy out Hayfin's existing institutional shareholders: Towerbrook Capital Partners, Australia's sovereign wealth fund and two other Canadian pension funds.

Hayfin's management and employees will retain their shareholdings following the deal.

The company, which has €8.2bn (£7bn) under management, has built a ‎successful business by lending money to medium-sized European companies since its launch by former Goldman Sachs partners in 2009.

It has lent more than €9bn (£7.7bn) since it was set up, with other corporate customers including Sunseeker, the luxury yacht-builder.

It also operates a strategy called special opportunities, and has business lines in maritime credit and healthcare, as well as offering asset management services to institutional clients.

The deal with Hayfin is expected to see the British Columbia-based fund commit significant funds for its expansion, although the London-headquartered lender will retain day-to-day autonomy over its operations and investments.

Insiders said the deal was attractive to Hayfin's management because it would simplify the company's ownership structure, as well as providing a platform for future growth.

In 2015, ‎Hayfin sold its portfolio of owned assets to The Future Fund, Australia's state-backed investor.

A Hayfin spokeswoman declined to comment on Monday, while BCIMC could not be reached.

Mr Flynn serves as Hayfin’s Chief Executive Officer. Prior to joining Hayfin, Mr Flynn was a partner at Goldman Sachs, where he co-headed the European Leveraged Finance and Acquisition Finance businesses. Mr Flynn was also a member of Goldman Sachs’ firm-wide Capital Committee.

Before joining Goldman Sachs, Mr Flynn was a corporate finance lawyer at Sullivan & Cromwell, a New York-based law firm.

Mr Flynn graduated from Columbia Law School, where he was a Harlan Fiske Stone Scholar and an Editor of the Columbia Law Review. Mr Flynn graduated from Georgetown University with a Bachelor of Science.

Canada’s business leaders are joining a new social-media campaign aimed at promoting more women in senior roles, publicly pledging to champion a woman in her career and challenging other executives to participate.

The #GoSponsorHer campaign asks top executives to name a woman they will help support publicly, post the pledge on a social media site such as Twitter or Facebook and then publicly “tag” two or three other senior leaders they know, challenging them to become sponsors to women of their choice.

McKinsey & Co. consultant Laura McGee, who helped launch the program with colleague Megan Anderson, said the public challenge works similarly to the popular “ice bucket challenge” campaign, but with a goal to help more women find powerful sponsors who will support their advancement into senior leadership roles.

Most sponsors choose women within their own company or industry, where they have the ability to make a meaningful impact in their careers, she said.

The campaign aims to highlight the critical differences between mentoring and sponsorship, she said. Leaders are urged to go beyond mentoring, in which they offer advice and support to women about their careers, and instead embrace sponsorship, which requires a more active effort to encourage advancement. There are no specific things sponsors must do, but they typically help women by making introductions, inviting them to work on key assignments and championing them for promotion.

“A sponsor will really stick their neck out and create opportunities – this is somebody who is personally committed to advancing your career,”Ms. McGee said.

Mark Wiseman, senior managing director at global investment firm BlackRock Inc., Ms. McGee’s sponsor in the program, said many top executives have benefited from sponsorship earlier in their careers, but those relationships have been socially easier for senior men to navigate with other men.

“The reality, especially in the investment industry, is that men have tended to have better sponsorship in their careers than women because it’s generally comfortable for men to sponsor other men, rather than for men to sponsor women,” he said.

Frank Vettese, chief executive officer of Deloitte Canada and a sponsor in the program, said women need sponsors not just talking to them about their careers but “leaning in on an unprecedented scale, putting their personal leadership on the line.”

“Research shows that women are over-mentored and under-sponsored,” he said in a statement.

The #GoSponsorHer hashtag on Twitter and Facebook reads like a who’s who of executives and politicians in Canada.

For example, Canadian Imperial Bank of Commerce chief executive officer Victor Dodig was an early supporter and challenged veteran businesswoman and corporate director Gail Cook-Bennett to participate. Microsoft Canada president Janet Kennedy challenged General Electric Canada CEO Elyse Allan. McKinsey global head Dominic Barton challenged three others, including Bank of England Governor Mark Carney and Teck Resources Ltd. CEO Don Lindsay.

Mr. Wiseman said the social-media aspect of the program is a simple way to spread the word about sponsorship to more senior people in business. He is participating, he said, because the investment industry has too few women in top roles and needs to draw the best talent from the widest pool of candidates.

“Quite simply, the industry has done a terrible job of that to date, and if we can crack that code, we’ll be better investors and put up better results,” he said.

Ms. McGee said research shows women are 46 per cent less likely than men to have an identified sponsor. They hold 33 per cent of senior management jobs, and fewer than 1 per cent of CEO positions.

The statistics suggest many senior men in leadership roles have an “unconscious bias” about who they really champion for advancement, she said.

“It’s really bad, and has been despite a number of policy and corporate changes over the past 20 or 30 years – the pipeline is not getting better,” Ms. McGee said. “Something is not working.”

I also found it interesting that he recently hired a woman, Dawn Fitzpatrick, a senior exec at the asset-management arm of UBS, to be his next CIO (click on image):

Soros didn't hire Ms. Fitzpatrick for her good looks or quantitative skills, he hired her because she's damn good at what she does, managing and allocating money:

A spokesman for Soros confirmed the hire. Bloomberg earlier reported the news.

Fitzpatrick replaces Ted Burdick, who left the position last fall but remained at the firm. While her start date is unclear, Fitzpatrick would be Soros' seventh CIO at Soros Fund Management since 2000.

At UBS, Fitzpatrick oversaw more than 500 billion Swiss francs across investment teams, according to her UBS bio. She previously was the head and CIO of a multibillion-dollar hedge fund owned by UBS. Fitzpatrick started her career in 1992 with O'Connor & Associates as a clerk on the American Stock Exchange.

Soros is also sending a clear message to his testosterone-challenged peers that if the king of hedge funds isn't scared to hire a woman for his top investment position, maybe they too should open their minds and start diversifying their workforce at all levels of their organization.

"Soros hiring a woman to be the CIO of his fund shows me he's more progressive than his testosterone-challenged peers who would never in a million years hire a woman to be the CIO of their fund and that maybe he's sick and tired of "big swinging hedge fund dicks" who think they're the next Soros. I'm sure Dawn Fitzpatrick is more than qualified for this coveted role and I hope she succeeds beyond her and Soros's expectations."

"When was the last time you went into a bank and you ever saw a person with a disability working behind the counter?"

It's a question that both David Onley, the province's special adviser on accessibility, and CIBC have been asking.

They seem to have come up with a similar answer.

"You probably have never seen one," Onley said — a fact that's reflected in many different workplaces, according to an Angus Reid survey commissioned by CIBC.

The survey involved 1,002 Canadians with disabilities; 37 per cent of those respondents of working age said they were unemployed.

Of those who did have jobs, roughly a quarter said they were working in a role that did not reflect the breadth of their qualifications.

500 new jobs

CIBC responded to the results by announcing it would hire 500 people with disabilities this year.

In a press release, however, the bank said it wanted its workforce to reflect "our diverse clients [and] communities."

"We want to let job seekers with disabilities know that at CIBC we focus on the abilities and personal strengths of people," said Laura Dottori-Attanasio, a senior executive vice-president and chief risk officer at the bank, in a press release.

Front-line staffers

About 1.8 million Ontarians identify as having a disability — and the province's accessibility adviser says seeing a bank draw from that talent pool is long overdue.

Onley suggested CIBC turn the majority of new positions into front-line staffers so that "people can see [that] this is [their] practice of hiring."

​Jamie Burton, vice president at an IT consulting firm that helps companies be accessible to its employees, said there's an advantage to hiring people with disabilities.

This untapped talent pool can help "solve their turnover rates, to increase innovation, [and] to have their employees reflect the communities that they serve," the Dolphin Digital Technologies executive said. "We don't give opportunities to see what [people are] capable of doing because our assumptions are in the way."