Mia Lamar of the WSJ reports, Hedge Funds Added Small Gains in January:

Hedge-fund performance perked up in January, although continued to lag the major stock indexes, according to industry adviser Hennessee Group.

Hennessee's hedge fund index rose 2.5% for the month of January, less than the Standard & Poor's 500 and Dow Jones Industrial Average, which posted gains of 4.4% and 3.4%, respectively. The Nasdaq Composite Index climbed 8% last month.

Still, the advancement in January comes after a dismal 2011 for the hedge industry, which has been battered by swiftly changing sentiment on Europe's sovereign-debt crisis and other macro concerns around the world. Hennessee's hedge fund Index fell 4.27% in 2011, marking the worst year for hedge funds since 2008.

"It is encouraging to see a respectable gain even with managers conservatively positioned," said Lee Hennessee, managing principal of Hennessee Group.

Equity long/short strategies were among the best-performing strategies last month, as the Hennessee Long/Short Equity Index advanced 2.47%. Stocks pushed higher in January, led by technology and financials, as U.S. economic data continued to show signs of improvement.

It's hardly surprising to see Equity long/short funds posted the best returns as stock markets rocketed up in January. In other words, once more, it's all about beta stupid!

There is however more good news for hedgies. Harriet Agnew of Financial news reports, Long/short hedge funds to gain from correlation decline:

Stock correlation within sectors has dropped significantly this year as markets have rallied, providing a boon for long/short equities managers who buy and sell companies based on fundamental analysis of their individual merits.

Giles Worthington, a portfolio manager at RiverCrest Capital, said: "Correlations are falling with quite a powerful force and diversity in stock returns is rising. This is good news for stock-pickers as once again investors are considering the difference between a high-quality and a low-quality company.”

The attached chart, published yesterday on Business Insider, illustrates the 21-day stock correlation within the Russell 1000 Index. It shows that correlation has fallen from a peak of about 0.75 in September to about 0.2.

Worthington said that the key short-term driver of this has been the European Bank's three-year provision of liquidity through its Long Term Refinance Operation that was announced in December.

He said: "The LTRO has significantly reduced the tail risk in the markets. The huge risk of financial implosion has gone away for the time being. Last year the markets were dictated by macro calls and now they are focusing on stocks."

For many managers, the drop in correlation is a welcome respite from the high correlations driven by macroeconomic newsflow that characterised the markets for much of last year.

Looking at valuations alone would have created the wrong idea: defensive growth stocks trading at high multiples performed well, while cheap cyclical stocks perceived as value investments suffered losses.

At times company share prices moved not on individual valuations but on the perceived country risk or currency risk of the issuer. Late last year, for example as investors became more concerned about France's triple-a rating potentially being downgraded, French stocks were sold off indiscriminately, in line with the market's perception of an inherent risk of investing in France.

According to data provider Hedge Fund Research, the average hedge fund gained 2.63% in January, with equity strategies leading the way, up 3.84%.

Among long/short equity managers, many of last year's biggest losers rebounded strongly in January. Crispin Odey's Odey European fund is up double digits this year, while Lansdowne Partners' UK fund gained 5.7% in January, investors said.

Worthington said that although stock selection detracted from his fund's performance in December, by January it accounted for 60% of the returns.

However, he also sounded a note of caution. He said: "The market always starts the year quite buoyant as companies invariably come out with good expectations and they have a full year to disappoint.

"There's been bit of a 'dash for trash' too - in the US, for example, the top-performing stocks this year underperformed by 40% on average in 2011. A lot of the highly-leveraged, high-cyclical companies have bounced as portfolio managers have rotated out of more defensive names."

According to Credit Suisse strategists, the rotation ratio in January was 76%. This means that around three quarters of sectors either outperformed in January 2012 after underperforming in 2011 or vice versa, the highest level of rotation since 2001. Banks are the most striking example of this, they said.

The chart was first reported by Business Insider blog.

In other news, Finalternatives reports that Goldman Sachs' former special situations chief will launch his new firm's maiden hedge fund next quarter along with another Golman and Tudor vet:

Richard Ruzika, global head of special situations at Goldman between 2007 and last year, founded Dublin Hill Capital in Connecticut with Lance Bakrow and Joe Howley. The Connecticut-based firm will unveil its Global Macro Fund in an effort to take advantage of the strategy's current popularity, HFMWeek reports.

Ruzika was co-head of global macro trading and global head of commodities at points during his 29-year career at Goldman.

Bakrow, another Goldman Sachs veteran, is a founder of Greenwich Energy Partners. Howley, a Tudor Investment Corp. veteran, was managing director of natural gas trading at Sempra Energy.

Whenever you read veterans from Goldman and Tudor are getting together to start a global macro fund, it's worth meeting them and discussing their new fund. Ask them lots of tough questions but this is the type of new fund I like investing in.

I've been tough on hedgies lately. Someone accused me of "waging war against them". Nothing can be further from the truth. While I've seen many "malakies" in the hedge fund industry, including nonsense within pension funds investing in hedge funds, I still believe that excellent hedge funds are worth investing with.

Do I believe in paying 2 & 20? A lot less than I used to. Why? Because most hedge funds are mediocre and the large ones are mostly asset gatherers. Moreover, institutions can replicate a lot of hedge funds strategies internally and if you're a large pension fund like ATP, you got a large enough balance sheet to beat them at their own game at a fraction of the cost. It's stupid to get eaten alive by hedge fund fees, making them rich for gathering assets.

Tonight I had dinner with some former colleagues. We all worked in hedge funds before. We were discussing how stupid it is for large public pension funds to pay millions in fees to hedge funds instead of developing alpha internally. These guys are sharp money managers and know all about hedge funds. One of the guys can slice and dice any hedge fund strategy and reverse engineer it. The other is a credit specialist who has done his share of due diligence on hedge funds and knows all about alpha and managing money.

We all feel that too many institutions are wasting their money on hedge funds. Save your money, develop alpha talent internally and don't waste your time and resources chasing hedge funds. And if you are going to venture into hedge funds, seed some alpha managers who are performance driven but don't take an equity stake!!!

All these institutions investing in hedge funds, including the Caisse and Ontario Teachers', should publicly disclose how much they've disbursed in fees since inception of their hedge fund programs. My guess is hundreds of millions. Sure, they've invested in some great funds, made money, but also got clobbered in others which you'll never hear about. The point is would they have been better off taking the ATP approach, investing in internal hedge funds? Results speak for themselves.

Below, Ann Pettifor, George Kapopoulos and Matina Stevis discuss the prospect of a Greek default on Al-Jazeera. Debt discussions in Greece have stalled on pension dispute. If Greece defaults, you'll see macro news take over again, and correlations rise across all asset classes (except bonds).

If all hell breaks loose, hedge funds will suffer. If a deal is struck, watch out, a massive liquidity rally could mean many hedge funds will underperform. Both scenarios would be bad for hedge funds, especially the former one. At the end of the day, most hedge funds are a lot more like mutual funds and pension funds in that they desperately need the big beta boost to make money.

Gregory Roth of Reuters reports, California pension eyes commitments to PE firms:

The $145 billion California State Teachers' Retirement System, the nation's second-largest pension fund, is actively considering making large separate-account commitments to private equity firms, a senior investment official at the fund told Reuters Buyouts Magazine.

The development comes on the heels of similar commitments made by the Texas Teachers' Retirement System and the New Jersey Division of Investment. "We're definitely looking at separate managed accounts," said Pascal Villiger, a private equity portfolio manager at CalSTRS. "It's definitely something that I think all large institutions are seriously looking at."

Late last year, two giant commitments shook the private equity world. The first, by Texas Teachers', involved committing $3 billion each to separate accounts managed by private equity shops Apollo Global Management and Kohlberg Kravis Roberts & Co.

A few weeks later, New Jersey pledged $1.5 billion to The Blackstone Group for three separate accounts covering a variety of investment strategies. This was in addition to $1 billion that New Jersey had already pledged to Blackstone Group in 2011 for its regular slate of private equity and real estate funds.

Separate accounts are different from typical private equity funds in that the investments are not commingled with money from other investors. Rather, they consist of customized investments for just one investor. Their advent represents a sea change in the way public pension funds, the largest sources of private equity money, use their huge size to drive down fees and negotiate better terms.

The trend toward separate accounts is also likely to help accelerate the ongoing transformations of the largest private equity firms into generalist asset managers equipped to offer their clients a wider scope of investments beyond private equity. Blackstone Group, for instance, now manages $137 billion in fee-earning assets, yet only 27 percent of its assets ($37 billion) are invested in private equity. The rest is invested in real estate, hedge funds and credit offerings.

Even though large separate accounts are relatively new in private equity, CalSTRS's Villiger said there were already a variety of flavors. "At one extreme, it's just basically co-investments alongside a commingled fund with reduced economics. At the other extreme, in terms of Texas Teachers', it's a very highly customized solution."

CalSTRS's move to consider large separate accounts was strongly hinted at in late January, when the pension publicly posted proposed changes to its investment policy that would allow such investments. The pension's board was scheduled to discuss the policy changes at its February board meeting.

In making its case, the proposal highlighted the advantages of separate managed accounts, among them "discounted fees and preferred terms," adding that "almost always, management fees will be lower and sometimes carried interest will be lower, too."

Under the proposed policy, each separate account would be limited to 10 percent of CalSTRS's private equity portfolio. But since CalSTRS has $21.3 billion in private equity holdings, it is feasible that separate account commitments could amount to as much as $2 billion each.

To be sure, separate managed accounts would probably represent just a fraction of CalSTRS's overall private equity program. Villiger said that with 14.7 percent of its overall portfolio in private equity, CalSTRS was already over its 12 percent target allocation. That said, he predicted that CalSTRS would probably spend between $2.5 billion and $4 billion on private equity each year.

"A sustainable pace is probably a number closer to $4 billion," he said.

Kelly DePonte, a fund marketer at Probitas Partners, said the recent moves by big pension funds to consider separate accounts represent much more than a desire to save on fees. "It's also a wish for more control," he said, "so that there is more of a conversation between the GP and LP about each individual investment."

Separate accounts make a lot of sense for large U.S. public pension funds. Not only do they get to lower fees, they can have more control over their investments and obtain significant knowledge leverage with their GPs.

I think you will see an increase in these type of separate account arrangements in the alternatives space because large investors are increasingly conscious of fees and trimming their GP relationships. You'll see this not just in private equity but in real estate and hedge funds too.

In Canada, such arrangements are rare because our large public pension funds prefer investing direct in private equity, co-investing only when it makes sense for them. Ive discussed these trends here and here. Below, some CNBC interviews with Steve Leblanc of Texas Teachers' and Jim Leech of Ontario Teachers' discussing their private equity strategy.

Ekathimerini reports that the leaders of Greece’s three coalition parties received on Wednesday morning the text of the outline agreement for a new bailout and are due to meet in the afternoon in an effort to reach consensus on the measures the government will have to adopt.

The drafts, which contain 32 pages setting out the reforms and fiscal targets the leaders will have to agree to, were delivered to the headquarters of PASOK, New Democracy and Popular Orthodox Rally (LAOS) at about 9 a.m. The document also contains some extra pages explaining some of the measures proposed.

A meeting between PASOK’s George Papandreou, ND’s Antonis Samaras and LAOS chief Giorgos Karatzaferis with Prime Minister Lucas Papademos has been scheduled for 3 p.m. but this could change.

Papademos was involved in talks late on Tuesday with the representatives of the European Commission, the European Central Bank and the International Monetary Fund -- known as the troika -- on the steps it would take to save 3.3 billion euros.

One of the stumbling blocks that emerged on Tuesday was the troika’s new demands for cuts to basic pensions, which start at 360 euros per month, as well as supplementary ones.

New Democracy had wanted auxiliary pensions to drop no lower than 300 euros but it is believed that the troika proposed that if this level is to be maintained then basic pensions should be cut. The reductions on basic pensions may apply just to those above a certain level.

In an interview with Dow Jones Newswires on Tuesday, Samaras indicated he was unwilling to accept more cuts to pensions. My enemy is recession,» he said. «Pensions have already been cut. Slashing them further will lead to even deeper recession."

It is also though that the draft agreement proposes a 22 percent reduction to the minimum wage of 751 euros per month, which may be passed on to private sector employees who earn more than this amount.

If the party leaders agree on Wednesday, then the troika officials are likely to hold talks with each of them individually to obtain their explicit commitment to the measures. It was not clear if this would involve written guarantees.

The new loan agreement would be submitted to Parliament on Friday and voted on two days later.

The Eurogroup of eurozone finance ministers is due to meet on Thursday to assess any potential agreement in Greece.

Of course, the reduction in minimum wage means an automatic drop in pensions:

What the party leaders are about to sign up to – again, if reports are correct – is the substantial reduction of the minimum wage and the abolition of the principle of metenergeia, or nachwirkung as its known in German law. In other words, if employers and unions manage to agree on new collective contracts, the baseline will be 20 percent lower than before, thereby affecting all the wage brackets above it. If the two sides don’t agree on new deals, employers will be free to negotiate individual deals with their employees. The basis for these agreements? The new, 20-percent-reduced, minimum wage.

While some of the political leaders will proclaim their role as saviors of Greeks’ hard-earned crusts by protecting the 13th and 14th salaries, it seems that all they have managed to achieve is swap a 15 percent reduction, which would have occurred if those monthly wages were lost, with a 20 percent one that will come with the slashing of the minimum wage and the terms under which collective contracts apply. Rather than two monthly salaries, Greek private sector workers are set to lose three.

The fact that some people are portraying this as a victory for their negotiating technique means that either they are woefully misinformed or, as is more likely, they are being intentionally duplicitous.

Others are more hopeful but cautious. "There is a path here for Greece, there is a way out for Greece, if it wants to take it, but there’s no denying this will be tough,” Grant Lewis, an economist at Daiwa Capital Europe Ltd. in London, said in a radio interview with Bloomberg’s Ken Prewitt yesterday. “You are talking about multi-year austerity packages against a backdrop of an economy that’s shrinking very rapidly.”

How tough will it be? Just look at the dramatic drop in budget revenues:

Budget revenues were found to be lagging by a considerable 1 billion euros in the year’s first month, provisional January data compiled by the Finance Ministry showed on Tuesday.

Revenues posted a 7 percent decline compared with January 2011, while the target that had been set in the budget provided for an 8.9 percent annual increase.

Worse still, value-added tax receipts posted an 18.7 percent decrease last month from January 2011 as the economy continues to tread the path of recession: VAT receipts only amounted to 1.85 billion euros in January compared to 2.29 billion in the same month last year.

The VAT revenue data represent a particular worrying sign regarding the depth of recession for 2012, while even more painful measures are expected to lead to a reduction in salaries and therefore a further drop in consumption. This is the vicious cycle that the government will have to tackle by way of additional fiscal measures this summer.

According to the current data, the 2012 budget will certainly have to be revised soon, given that the original estimate for a contraction of 2.8 percent is now raised to 3.5-4 percent of gross domestic product.

Finance Ministry officials attribute the slump in VAT receipt figures to the major cash flow problems that enterprises are facing. Some of the latter are choosing not to pay for their VAT in order to plug other holes caused by liquidity problems.

At the same time the crisis is seriously hurting the competitiveness of Greece’s economy, resulting in a considerable drop in entrepreneurship. Finance Ministry data showed that some 111,000 companies shut down in 2011, against just 75,000 new businesses being set up. In fact the majority of new start-ups are not actual enterprises but newly self-employed professionals.

This is attributed to the dramatic fall in market turnover and the insecurity that entrepreneurs feel, dissuading them from getting engaged in the local business field.

The consequence of that is the reduction of state revenues from corporate tax.

Must admit my first thought after reading about the dramatic drop in budget revenues was they are lying to make their case for less austerity. But it is possible that they're telling the truth and that austerity has reached the point where tax revenues are declining dramatically.

In any case, a new poll shows that the the Democratic Left has attracted the support of a large segment of austerity-weary Greeks:

Dissent-ridden socialist PASOK is on a downward spiral and conservative New Democracy is maintaining its popularity while the Democratic Left has attracted the support of a large segment of austerity-weary Greeks, according to the results of a new opinion poll that also show that nine in 10 Greeks are unhappy with Prime Minister Lucas Papademos’s coalition government.

The new poll, carried out by Public Issue for Skai, showed ND to have inched forward to 31 percent, consolidating its growing popularity, while PASOK continues to languish in fifth place with 8 percent.

The poll, carried out on a sample of 1,002 people last week, showed the Communist Party (KKE) and the Coalition of the Radical Left (SYRIZA) to be holding firm at 12.5 and 12 percent respectively. But the Democratic Left has surged in popularity, garnering 18 percent of the public vote (up 4.5 percent since last month).

All together, the leftist parties garner an impressive 42.5 percent, but as KKE has ruled out cooperating with other parties, the figure is misleading.

Support for the right-wing Popular Orthodox Rally (LAOS), the third party in the tripartite coalition, slipped to 5 percent -- from 8 percent during its heyday in 2010 -- while the extreme-right Chrysi Avgi (Golden Dawn) has surged to 3 percent, hitting the threshold for entering Parliament.

The poll’s results for parties are broadly reflected in the support for the politicians that lead them. Democratic Left leader Fotis Kouvelis tops the list, attracting the support of 56 percent of respondents, followed by 41 percent for SYRIZA’s Alexis Tsipras and ND chief Antonis Samaras with 31 percent.

Respondents were divided on Papademos, with 48 percent expressing a negative opinion and 46 percent a positive one. Respondents were virtually unanimous though in their criticism of his government’s achievements, with 91 percent expressing disappointment.

What this tells me is that even if Samaras wins the next elections, he'll be heading a minority government and will face stiff opposition from leftist parties. That's one of the reasons why they're trying to finalize the agreement with troika as soon as possible.

What remains to be seen is whether all these austerity measures will succeed or throw the country deeper in recession and ultimately, into a much more severe crisis.

Below, Grant Lewis, an economist at Daiwa Capital Europe Ltd., talks about the European sovereign-debt crisis, the outlook for private-sector involvement in Portuguese debt and the risk of contagion. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."

Also, Yanis Varoufakis, professor at the University of Athens, told CNBC, "this bailout is certainly not the right answer for anyone, for Greece, for the euro zone, for the world. Here we have a typical bankruptcy problem, the first time around we decided to treat it like an illiquidity problem, it wasn't." Varoufakis thinks Greece should default "instantly, immediately" and remain in the eurozone.

A follow-up on my previous comment on why it's time to pull the plug on hedge funds. Ever wonder how those super secretive, 'elite' hedge funds make a killing? I'll go through it with you below, poking some fun at the hedge fund industry.

Let's say we wanted to start a hedge fund. First, we'll choose a name. Since we know the industry is full of malakes, we'll call it MCM, short for Malakia Capital Management. We'll fill out all the paper work, rent some fancy offices, hire some cute administrative assistants to get things off the ground.

Then, we'll hire a couple of Russian physicists, Igor and Yuri, to program malakies all day and help us out with our marketing material. They are used to make our hedge fund look legitimate and sophisticated so when institutional investors come around, we pass their due diligence and bombard them with all sorts of fancy risk metrics and eye-popping risk-adjusted 'pro forma' returns.

Speaking of eye-popping, we'll also hire Yuri's cousin, Tatiana, a smart and sexy Russian salesperson. Here she is below.
Tatiana is polished, highly educated, very sharp, and very hot. She knows all the hedge fund 'lingo' and more importantly, she's a shark. We'll send her off to all those silly hedge fund conferences in London, New York and Geneva where she'll work the crowd, targeting lonely institutional investors horny for hedge funds.

She'll peddle our "niche strategy" and "high Sharpe ratio". Hell, as long as the suckers show interest, she'll peddle any ratio they want over dinner and drinks. She's very cunning and can charm the toughest client. And if things get sticky, she can play dirty (bribes, prostitutes, whatever it takes to close the deal).

If things go well, our assets should be mushrooming in no time. We choose to run a legitimate operation. No Bernie Madoff scams for us. We'll get a reputable hedge fund administrator and hire some more quants to help Igor and Yuri 'reverse engineer' the portfolios of all the elite hedge funds (more malakies).

Except we won't be doing any reverse engineering at our shop. Instead, we're going to track the 13-F filings of elite hedge funds and try to go long or short their holdings. The data is delayed, typically coming in 45 days after end of quarter, but if you use the information wisely, you can make money leeching off these top funds.

To illustrate, let's take the institutional holdings of Peak 6 Investments, one of the best L/S equity hedge funds. You'll notice at the end of Q3, they reported holding 1,684 positions with a total market value of $3.5B.

Admittedly, these are only their equity positions with a delay. Some large hedge funds do all sorts of complicated strategies using OTC derivatives, high-frequency trading and churn their portfolios many times in a quarter, but we'll keep things simple just to illustrate.

First, look at their top holdings (click on image to enlarge):

Then, click on the top of the second column (value of shares) twice to get their top dollar-weighted positions (click on image to enlarge):

Lo and behold, sometime in Q3 2011 when the shit hit the fan, this elite fund cranked up the risk, went long the market (bought a ton of S&P 500 ETF) and bought sizable positions in tech shares of Ciena (CIEN), Akamai Technologies (AKAM), NetApp (NTAP), Microsoft (MSFT) and other "high beta" stocks which handily outperformed the overall market since the end of September.

That, in a nutshell, is how 'elite' hedge funds make money. That's why while most hedge funds are mediocre, the top funds are worth tracking closely. Here I used Peak 6, but we can track many more funds, including hedge funds that are closed and top long-only funds, and cross reference their holdings.

Importantly, forget what Bill Gross, George Soros, Jim Rogers and other 'gurus' are saying on CNBC and focus on what top funds are actually buying and selling. Words mean nothing, show me their actual book!

It's not perfect, there are lags, but if you track the right funds, you'll get plenty of ideas on where you should be taking opportunistic risk and you don't have to pay 2 & 20 to any of them!

Ok, now that I shared some insights with you, who wants to invest in Malakia Capital Management? Too late, most of you are already investing in them, getting eaten alive on fees. Funny thing is that the world's best hedge fund is actually a pension and they're wisely avoiding all these malakies.

Below, a classic scene from Boiler Room. Unfortunately, it's not just unsuspecting doctors that are getting scammed. In these markets, the biggest sharks are charging 2 & 20, ripping off institutional clients in all sorts of hedge fund strategies.

Buyers beware, when the next crisis hits, you don't want to end up being the biggest malaka on the block, left holding your nuts!

Christine Williamson of Pensions & Investments reports, Institutional investors set to dump poor hedge fund performers (h/t, Abnormal Returns):
Institutional investors will be sharpening their scalpels in 2012, cutting managers that failed to provide what they promised: absolute return.

Last year was the second-worst year for hedge fund performance in the 22 years that Hedge Fund Research Inc. has been tracking industry returns, and the patience that institutional investors had for subpar hedge fund performance is evaporating fast, said industry sources.

Industry insiders predict 2012 will be characterized by significant manager rotation within hedge fund portfolios.

“The hedge fund investment trend won't reverse, but many institutional investors will be carefully evaluating how individual managers and strategies contributed to their portfolios,” Anita Nemes, London-based managing director and global head of capital introduction in Deutsche Bank's Hedge Fund Capital Group, said in an interview.

“This assessment is precipitated by huge performance dispersion in 2011 in some strategies, like long/ short equity, but investors will be making their assessment over the longer time frame of the past few years,” Ms. Nemes added.

Last year was only the third since the HFRI Fund Weighted Composite index's inception in 1990 in which the index's return was negative, at -5.02%. The 2011 returns of hedge funds of funds were even worse, with the HFRI Fund of Funds Composite index producing a dismal -5.51%.

By comparison, the Standard & Poor's 500 index returned 2.1% in 2011; the Russell 3000 index, 1.03%; the Morgan Stanley Capital International All-Country World index, -6.69%; and the Barclays Capital U.S. Aggregate Total Return index, 7.84%.

“2011 was a good testing ground for hedge fund managers who professed to be able to manage risk. Those hedge funds that were not able to preserve capital are going to be under scrutiny,” alternative investment consultant Stephen L. Nesbitt said in an interview.

“The tide went out last year and you could see who didn't have any pants on. Managers complained that everything was correlated in 2011 and they couldn't be expected to perform. There always is an excuse,” said Mr. Nesbitt, who is CEO of Cliffwater LLC, Santa Monica, Calif.

With chief investment officers weary of excuses, Mr. Nesbitt said he expects “an above-average number of manager searches” in 2012, similar to the first half of 2009, when investors upgraded their manager rosters after the financial crisis in 2008. Mr. Nesbitt said Cliffwater's own clients likely will be among those making changes, but declined to disclose any names.

Deutsche Bank's Ms. Nemes said the biggest change for institutional hedge fund investors since 2008's financial market meltdown has been “so much more emphasis on bottom-up manager selection. And if you were not achieving your performance expectations, how you can effect a change going forward is through manager changes.”

“Fundamentally, institutional investors are not focused on changes to hedge fund portfolio construction as much as they are on assessing which managers will do best in the strategy weightings within their portfolios,” Ms. Nemes said. Part of that evaluation of hedge fund manager skill has to include assessment of the individual manager's ability to find investment opportunities regardless of market conditions, said Michael Rosen. As principal and CIO of Angeles Investment Advisors LLC, Santa Monica, Calif., Mr. Rosen advises institutional clients on hedge fund investments and manages the firm's $160 million hedge funds-of-funds strategy.

“You have to analyze the purpose of each hedge fund in your portfolio and what your expectation of that manager is. If a merger-arbitrage manager is sticking to his investment strategy and the market isn't favoring merger arb, then that manager may be meeting your expectations,” Mr. Rosen said.

Mr. Rosen said that in a manager-by-manager portfolio evaluation, the hedge funds he and his team are most focused on are those in which the manager's investment process has not worked and the manager seems “unsure about where to find opportunity. The question is not really so much about performance as it is about the lack of agility, the inability to see how they can make money.”

The $425 million Louisiana State Police Retirement System, Baton Rouge, is one fund that recently upgraded its hedge fund portfolio to improve performance (Pensions & Investments, Jan. 23). EnTrust Capital Management Inc. was hired in January to run $10 million in a hedge fund-of-funds strategy, replacing GAM, which was terminated for performance reasons in September.

Still, sources were unable to give specific examples of hedge fund and hedge fund-of-funds managers that have seen big redemptions or are among those most likely to be excised from institutional investors' portfolios.

But “drawdowns (negative performance) of a certain size will definitely put a hedge fund in the running” for replacement, said Donald A. Steinbrugge, managing member of third-party hedge fund marketing firm Agecroft Partners LLC, Richmond, Va.

Attention-getter

Paulson & Co. Inc. is a large, institutionally oriented hedge fund manager that got a lot of attention last year for disappointing returns. The hedge fund management company that produced a 159% return in 2007 from stellar subprime mortgage bets in its Paulson Advantage Plus Fund sustained a -35% return in the same fund in 2011. The company's oldest fund, the flagship Paulson Partners Fund, was down 10% in 2011, and Paulson Credit Opportunities Fund dipped 18%.

Net redemptions across all of Paulson & Co.'s hedge funds last year were less than in 2010, which in turn were less than 2009 redemptions, said a source with knowledge of the company, who asked not to be identified. The company's assets totaled $28 billion as of Dec. 31, but dropped to $23 billion on Jan. 1 when redemptions and performance were factored in, the source said.

Armel Leslie, a company spokesman, declined to comment.

But Agecroft's Mr. Steinbrugge predicted that “any drawdown of 30% or more just is not acceptable and will not be tolerated.”

He said as investors upgrade, they will be looking for hedge fund and funds-of-funds managers with strong risk controls that enabled them to produce positive returns last year despite extreme market volatility and high correlations between asset classes.

One institutional hedge fund manager — Bridgewater Associates LP — produced 15.3% in its Pure Alpha II fund in 2011. It had annualized returns of 14.6% for the 20 years ended Dec. 31.

The institutionally focused hedge fund Renaissance Institutional Equities Fund, managed by Renaissance Technologies Corp., also had strong performance — 35% — in 2011, although net inflows were “negligible,” according to a source who asked not to be identified.

Jonathan Gasthalter, a RenTech spokesman, declined to comment.

Institutional CIOs might need to move fast if they want to upgrade to 2011's best performers, Simon Ruddick, managing director and CEO of hedge fund consultant Albourne Partners Ltd., London, wrote in an e-mailed response to questions.

“Capacity is fast disappearing with those better-known funds that performed well in 2011, so opportunities to switch into them may well become limited. After way more talk than action, 2012 might see some shift to smaller funds,” he said.

With all due respect to Simon Ruddick, the last thing institutional investors should be doing is chasing hedge funds. Smart institutional investors realize they're getting eaten alive by hedge fund fees. And don't forget, the world's best hedge fund is actually a pension that doesn't invest in hedge funds, preferring to do it all internally at a fraction of the cost. But institutional investors keep pouring into hedge funds, chasing after them, foolishly believing that hedge funds will save them.

Let me repeat, the bulk of hedge funds are mediocre, hyped-up asset gatherers collecting 2 & 20 for delivering beta or even worse, sub-beta results. They absolutely stink. And most institutional investors that keep chasing after hedge funds don't have a clue of what they're doing. Most of these institutions are wasting time, money, and other resources chasing after a pipe dream.

How do I know? I used to invest in hedge funds, some of the best in the world. I went to those silly hedge fund conferences where I saw morons chasing after hedge fund managers. A bunch of horny imbeciles with hedge fund hard-ons chasing after pretty young sales ladies in short skirts peddling them hedge fund hype. The nonsense I've witnessed in the hedge fund industry is utterly scandalous.

John Authers of the FT is right, hedge funds have grown too big and need pruning:

Is there any such thing in the world of finance as a good idea that does not in time get taken too far, and flogged to destruction? I am beginning to doubt it.

If the financial world had any relative “winner” from the disaster of 2008, it was hedge funds. The long-feared collapse of a big hedge fund never took place. Banks turned out to create far more systemic risk. Some smart hedge fund managers actually saw the crisis coming and made money from it.

Managers like John Paulson, who made a huge bet against subprime mortgages, or David Einhorn, who aggressively sold short the shares of Lehman Brothers in a bet that they would go down, while publishing evidence that the investment bank’s accounts were fatally flawed, emerged from the crisis almost heroic – and very much richer.

Their lightly regulated business model, which allows them to borrow, to sell short, and to limit opportunities for investors retrieve their money, seemed superior to regulated funds.

Indeed, hedge funds soon repaired the damage. By the end of 2011, according to Hedge Fund Research of Chicago, the sector’s assets exceeded $2 trillion, greater than in 2007. In the last two years, a net 500 new hedge funds were created.

But it begins to look as though the sector has overplayed its hand. The release of Mitt Romney’s tax returns in the US illuminated what many did not realise – that wealth created by hedge funds is leniently taxed. Alternative asset managers suddenly face political attack.

Those proved right four years ago are now making mistakes. Mr Paulson took a loss of about $500m in the Chinese forestry group Sino-Forest last year as it fought short-sellers’ charges of fraud. As for Mr Einhorn, he had to pay a huge £7.2m fine to the UK’s Financial Services Authority this week, for market abuse.

The hedge fund industry as a whole is not looking so smart. According to HFR, the average hedge fund lost 5.02 per cent last year, only their third down year since 1990. Since August 2008, the eve of Lehman, hedge funds have almost exactly matched the S&P 500 stock index, and far underperformed bonds. Funds of hedge funds, with an extra layer of fees, have fared far worse, and are still 6.5 per cent below their level of August 2008.

They have some excuses. Correlations between securities and between asset classes are extremely high. That is bad news for hedge funds, many of whose strategies rely on correcting mispricing anomalies, selling short overpriced stocks and buying cheap ones. Such strategies fail if all stocks move together in response to the latest macro news.

But global macro funds collectively failed to exploit the twists and turns of the eurozone crisis. Some did. But most seemed to be flummoxed by the need to gauge political as well as financial risks.

Further, Mary Bartels of Bank of America Merrill Lynch shows that the correlation of several hedge fund strategies with the stock market reached record levels last year. That surely defeats their purpose, which is to provide a “hedge” - and implies that the sector is overcrowded, with too many players overexposed to the stock market.

Richard Bernstein, a New York investment advisor, points out acidly that treasury bonds offered true diversification, moving in the opposite direction to stocks. Hedge funds, despite their name, did not. “Traditional asset allocation has provided diversification, superior returns, liquidity and cheaper fees,” he said. “Alternatives have under-performed, are highly correlated to other asset classes, hinder liquidity, and charge high fees. This seems to be a comparison of a superior, less expensive product to an inferior, more expensive product.”

Many hedge fund strategies have a limit on how much money can be deployed, as there are only so many mispriced assets. When too much money makes the same bet, and copycats pile in, returns look ever more like the stock market itself. This is known in the industry as an “overcrowded trade”. It looks increasingly as though hedge funds owe their great performance in the decade before the crisis to cheap leverage, and cannot repeat the trick now that far more funds are trying to perform it.

Some hedge fund managers continue to use the freedom of their lightly regulated environment to reap fantastic returns each year. But many hedge funds are run by former traders using space on an investment bank trading floor, and using ideas spoon-fed to them by the research departments of investment banks.

For the sector as a whole, the picture is now familiar. Hedge funds have grown too big, they are copying each other, and they are tracking the market, but charging big fees for it. That is exactly what has already occurred in the world of mutual funds and unit trusts.

There are too many hedge funds. Those investors lucky enough to be able to invest in them should ask their fund managers whether they really need to exist.

Of course they need to exist. How else will they buy their Ferraris and yachts? And now that investment banks are scaling back bonuses, you're going to see a bunch of disgruntled prop traders who think they're the next Soros open up their hedge fund trying to get a piece of the action. Few will succeed, most will perish.

But their timing may be right. Reuters reports that stock gains turn hedge fund losers into winners:

Last year's hedge fund losers may be turning into winners again.

Several of the largest hedge funds that ended last year deep in the red, jumped to good starts in January, giving their wealthy investors reason to believe savvy traders are getting back their magic touch.

Lee Ainslie's Maverick Capital staged a dramatic rebound, leaping onto the list of top-20 performing funds in January thanks to a 5.89 percent gain in the first weeks of the year. In 2011, he lost 15 percent.

Even John Paulson shared good news with investors when he announced that his Advantage Plus Fund rose 5 percent last month after having been touted as the industry's biggest loser in 2011 with a 52 percent loss. By comparison, the benchmark S&P 500 index rose 4.4 percent in January.

But most prominently, the relatively small Henderson European Absolute Return fund, with about $116 million in assets, currently claims top honors as the year's most profitable fund with a 14 percent gain through late January, HSBC data show.

Last year that fund, known for its manager's contrarian stock picks, ranked second highest on the list of the year's biggest losers with a 42 percent decline.

Fortress Investment Group, one of a handful of publicly traded asset managers, also started 2012 with solid gains after several of its portfolios struggled in 2011.

Its Fortress Macro Fund rose 3.82 percent through January, while the Fortress Asia Macro Fund gained 2.21 percent, according to an SEC regulatory filing Monday. The firm's commodities fund dipped slightly, down 0.43 percent.

One month clearly does not make a year, but for last year's big losers, the January rebound could be a sign their fortunes are changing because the stock markets are doing better and they have made adjustments to their portfolios, investors said.

In fact, much of the $2 trillion hedge fund industry is looking for a revival this year, after funds, on average, posted a 5 percent decline in 2011.

"January can be characterized as having been generally strong across the board," said Paul Zummo, co-head and chief investment officer at JP Morgan Alternative Asset Management.

Similarly, Dan Loeb's Third Point Ultra fund is on the list of winners with a 5.8 percent gain in January after having dipped 2.3 percent last year, and David Tepper who finished 2011 down in the low single digits, turned the corner with a gain in the low single digits in January, people familiar with their numbers said.

While welcome, January's turnaround does not come as much of a surprise for the hedge fund industry considering the stock market's strong start to the year, investors and managers said.

So-called long-short equity funds turned in some of the industry's best returns, with an increase of 2.62 percent in January, analysts at Bank of America Merrill Lynch found. Last year, these types of funds which invest more than a trillion dollars in the stock market, lost about 19 percent.

Adjusting positions helped. After many hedge funds stumbled last year from too many managers chasing the same opportunities, crowding into big stocks like Bank of America, the appetite has shifted this year to small cap stocks, Merrill Lynch analysts said. But at the same time, Bank of America is up 35 percent amid slightly better economic numbers and hopes that Europe's financial crisis can be sorted out.

"Hedge fund managers tend to do better in environments that are not as driven by macroeconomic and politically driven fundamentals," JP Morgan's Zummo said.

Last year's winners are also benefiting from more favorable conditions. Steven A. Cohen's SAC Capital Advisors gained about 2 percent in January after rising 8 percent last year, and Kenneth Griffin's flagship funds at Citadel, climbed 3 percent in January after a 20 percent increase last year.

Not everyone has called an all-clear on the troubles that wrecked last year's returns.

"It is no time to put on our party hats," said one executive at a mid-sized hedge fund who can not be quoted publicly and worried that Greece's debt problems will still make investing tough because many fund managers are exposed to European banks who are in turn exposed to Greece.

My take on all this? I saw it coming last year when I wrote my comment on hedge funds being on the ropes. It's all about beta, not alpha! They all piled into risk assets early in 2012 and they'll keep piling into them hoping to shoot the lights out this year to save their skin and crank up their marketing machine.

Bottom line: With few exceptions, the hedge fund industry is a joke, bunch of momentum driven beta chasers, but the real joke is on pensioners whose contributions enrich these hyped-up money managers.

In the weeks ahead, I am going to use publicly available 13-F filings to show you exactly where "elite" hedge funds (many of which are closed) have been making their money and where they're placing their bets in the stock market (bulk of money still goes to L/S equity hedge funds).

If pensions had half a brain, they'd pull the plug on hedge funds and use the information I provide them on this blog to beat hedgies at their own game at a fraction of the cost.

I'm also very concerned about the concentration of money going to a few well known hedge funds. This is a recipe for disaster because when the next major shock occurs, these mammoth funds could get whacked hard. This is why some of the smarter institutions are going against the current and carefully seeding new hedge funds.

Below, Tony James, president of Blackstone Group LP, talks about criticism of private-equity firms and impact on the industry. James, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses investment strategy. Blackstone is one of the best alternatives shops in the world, investing in private equity and hedge funds.

As Greece's government and international creditors work on the final rescue draft, Andreas Koutras writes, A Bridge (loan) Too Far?:
In September 1944, the allies had a daring plan. They would try to force an entry into Germany by overrunning the bridges of the Maas and Rhine River with airborne forces. If successful, the end of the war would be sped up, possibly to Christmas 1944. Thus the legend of Para Lt Colonel John Frost and the sacrifice at Arnhem was borne. Operation Market Garden as it was named ultimately was a failure. The Hollywood film was not. Incidentally, the film’s title apparently comes from Gen. Browning comment “I think we might be going a bridge too far”.

Moral Hazard

As the maturity of the March 2012 Greek bond nears, the question is still hanging. Would the EU provide a loan to avoid a disorderly default by a European country or would it be simply a bridge loan too far? The PSI started its life in July 2011 and it was barely three months old before it was scrapped for a newer and more severe version in October 2011. Tons of cookies (ammunition) have been consumed in the meeting rooms and possibly a million air-miles have been awarded (Distinguish Service) to the Troika and Greek officials. And yet it seems that we are not nearer in producing a viable solution.

The latest spat is not between the IIF and Greece with regards to the coupon structure of the new Greek bonds but between the Greek politicians who refuse to implement what they have agreed too and Troika. The logic is simple and it involves the moral hazard of reducing ones debt without removing the causes of producing it the debt. It is not a secret that the unscrupulous Greek politicians are mainly responsible for the mess Greece is in.

For decades, many mismanaged public finances for their personal good or re-election prospects. After all, the money flowed from the equally moronic EU with no strings or safeguards attached. So here is the main problem. If the debt of Greece is halved or becomes a minor nuisance while keeping the same policies and politicians in power then the risk of a repeat crisis in a few months from now is great.

The EU is locked into negotiations with a Greek political establishment that regards ignorance, irresponsibility, corruptness, being incompetent and self-centred as a comparative advantage. To deceive is a quality worth defending. It took the EU a couple of years to figure it out and now they are asking for pre-PSI written commitments and legislation by the Greek political parties.

This is a double whammy for the Greek people who have no means of escaping either their politicians or the wrath of the EU policies. Many see the EU money as effectively sustaining the same politicians in power in an analogous way that buying Libyan oil propelled Gaddafi and his regime.

Escrow Account-Bridge Loan

In that respect the latest idea of having an escrow account controlled by the EU that pays only the maturing bonds could be of use. It is clearly much better than the sick and abortion of an idea of a fiscal commissar. How would it work? Simply, the Troika would provide the money with the debt service as a priority. It resurrects the idea of a bridge loan should the PSI talks fail. As it is not called a bridge-loan but an escrow account it also semantically bypasses the Merkel comment of no-bridge-loan.

Would this idea be enough to avoid a Greek disintegration or would it be a bridge-loan too far? My guess is that unless there is political catharsis in Athens nothing would work. In many ways this is what the EU is trying to do in a clumsy sort of way.

Like in Operation Market garden, the EU badly mismanaged the bailout and the reaction of the opposition. Papademos the modern John Frost parachuted in and managed to partially dislodge PM Papandreou. However, it has few troops. Frost at Arnhem Bridge[1] had 740 when 10,000 were promised. The reinforcement never arrived and after it was held for double the predicted time of 4 days he surrendered.

This could be the fate of Papademos too. The main reason is that the Greek people are lost, disappointed and bewildered. Their political parties and system are incapable of making the transition to civilization but are more than capable at surviving the attack. Hope is dying fast in Greece and desperation is taking its place. Greece like Germany in 1944 may have to wait for another year until the regime collapses amid the total destruction. Until then Europe would be throwing good money after bad, or as in Arnhem good men to their death.


[1] The bridge war renamed to John Frost bridge in 1978. Frost published two autobiographies "A Drop Too Many" and "Nearly There".
Hope is dying in Greece. People there realize that no matter what happens, they are screwed for many years. On Greek television this morning, they discussed the insanity of accepting more austerity like a reduction of minimum wage and now Greeks are taking swipes at Germans who want Greeks out of the Euro.

Worse still, Greeks are claiming that Germany made huge profits off the eurozone crisis. I'm not so sure about these Greek claims as even German workers are demanding a raise as their economy teeters on recession.

One thing is for sure, however, Greeks face a difficult decision and are losing hope. Why? Because troika has been myopically (and foolishly) focusing on austerity as the country sinks deeper into an economic abyss. Greeks are fed up with troika, fed up with Germany and France, and most of all, fed up with their incompetent and corrupt political leaders (which they keep electing into office!).

And as I stated in my last comment, now is not the best time for Greek default, but it increasingly looks like that is where we are heading. If not now, sometime in the future. Germany and France have to take a step back and consider their actions more carefully.

Importantly, Greece may be totally insignificant in terms of its economy, but it remains the heart and soul of Europe. Anyone who thinks that the eurozone can survive without Greece is a fool with no sense of history. Once Greece is gone, others will follow, and eurozone will unravel fast.

Speaking of history, Europe's leaders should read Keynes' great work, The Economic Consequences of the Peace. Austerity could once again sow the seeds of extremism in Europe, and that's something we can all do without.

Below, John Taylor, a professor of economics at Stanford University, talks about the U.S. federal budget deficit and fiscal policy. Taylor also discusses Federal Reserve monetary policy and Greece's debt crisis. He speaks with Trish Regan on Bloomberg Television's "Street Smart." On Greece, he says "A walk away would be a default. Nobody wants to do this at this point."

And Eva Kaili, a Greek member of parliament, talks about efforts to complete terms for a 130 billion-euro ($171 billion) rescue package. She speaks from Athens with Maryam Nemazee on Bloomberg Television's "The Pulse." Do not agree with everything she says but she expresses the views of most Greeks who are quickly losing hope.

Jeff Cox of CNBC thinks now is the best time for a Greek default:

As sovereign debt defaults go, there may be no better time than now for Greece.

Global investors are clearly in risk-on mode, with the US stock market off to its best start in 15 years and equities in many emerging markets faring even better.

Friday's job report helped assuage at least one of the primary fears regarding the U.S. economy, even though the housing market remains a shambles-an improving shambles, but still a long ways from healthy.

Last week in general gave life to the recovery theme, with 15 of 23 indicators beating expectations and causing some economists to raise their growth outlook for the full year.

So, with sentiment running so garishly positive, why not go ahead and get that pesky Greek default and all of the accompanying futile denial out of the way already?

"In the last six months, there's probably been no better time to let Greece strategically default than right now," said Citigroup credit analyst Jason Shoup.

Shoup was quick to point out that a Greek debt default is not Citi's "base case," or most likely outcome, but one that needs to be taken seriously if the markets are ever to absorb the magnitude of Greece's problems and come out intact on the other side.

One key reason is that the window could be small for the present enthusiasm to last.

Some economists consider the startling jobs growth-a 243,000 surge in payrolls and an unemployment rate drop to 8.3 percent-unsustainable and as much a product of statistical anomalies as a jump in hiring. Specifically, a revision that saw the workforce drop by 1.2 million and a consistent drop in the labor force participation served as troubling signs.

If the recent uptick in economic indicators is indeed transitory, policy makers may want to consider attacking the Greece situation now while the market can still bear it.

"Letting Greece default either after a (Private Sector Involvement) haircut or in lieu of may have been unthinkable just a few months ago, but it wouldn't surprise us if resistance to such an idea may be weakening in the halls of Brussels and Frankfurt," Shoup said. "Certainly, buoyant markets seem to be emboldening policymakers to take more of a hard line even while Portuguese bonds oscillate."

Indeed, there's the Portugal problem.

It's hardly a secret that Greece will be only the first of several dominos likely to fall in the Eurozone sovereign structure. Several of its neighbors face burgeoning obligations that they cannot meet, and Greece's importance as much as anything is that it will serve as a signpost for how future crises will be handled.

An orderly Greek default in which panic is limited and bondholder haircuts are contained means future defaults may not capsize the markets either. But let the crisis spread and the fallout could be catastrophic.

Bob McKeee, chief economist at Independent Strategy, a London-based research firm, told CNBC that Portugal will be next on the agenda. The nation is far more stable than Greece, which is why the eurozone needs to address its problem children first and then work on more manageable problems.

Concerns over Portuguese debt have come since the nation's 10-year bond rates hit their highest level since the creation of the European Monetary Union. That came after a debt downgrade from Standard & Poor's. In a supposedly solid country with a new government, investor confidence remains a problem.

"We believe this is a sign that, despite the tentative progress made by eurozone leaders on a 'fiscal compact' and increased liquidity support from the (European Central Bank), the eurozone remains in crisis," London-based Capital Economics said in a research note.

News over the weekend that no agreement has been reached in Greece mildly spooked the markets in Monday trading.

The developments show that despite liquidity assurances through the ECB's Long-Term Refinancing Operations, the market wants some closure on how the European crisis will be handled.

Making a decisive move at a time when global markets have stabilized and appear ready to handle shocks, and before other debt obligations in nations such as Italy come to the fore, likely will be just the right medicine.

"While a sovereign debt default in Greece or Portugal might not trigger the end of the euro," Capital wrote in its note, "such an outcome in Italy could very well do just that."

The article is wrong in many respects. First of all, it is true that risk appetite has grown since Q3 2011, mainly because things are improving in the United States and will continue improving for the remainder of the year. Investors better get used to positive economic news coming out of the United States.

Second, and more importantly, even if risk appetite has grown, the global economy remains fragile and vulnerable to any shock. Letting Greece default would be the stupidest thing eurozone leaders can do at this point.

I say this because as I watch Greeks delay bailout talks as Merkel demands action and Merkozy setting up a firewall on Greek debt, I fear that both Greek and eurozone leaders simply do not understand what's at stake if Greece defaults. Time is running out for Greece which is why they have accepted demands by creditors to cut 15,000 jobs in the public sector this year.

But Germany and troika need a reality check too. It's time they recognize there are limits to austerity. Some of the measures they are demanding make no economic sense whatsoever. One professor on Greek television said it best: "They're threatening to light the house on fire so they're asking us to jump out of the window one by one".

Reducing the minimum wage is one measure that makes no sense. And Greek politicians have stop playing the charade with troika on trying to save private sector wages:

Within minutes of PASOK’s George Papandreou, New Democracy’s Antonis Samaras and Popular Orthodox Rally’s (LAOS) Giorgos Karatzaferis completing their make-or-break talks with Prime Minister Lucas Papademos on Sunday night, statements about battles being fought and rights being salvaged were launched into the Athens night.

Samaras and Karatzaferis led the charge of the white knights who claimed to have ridden to the rescue of the embattled Greek citizen. Their argument was that through “tough negotiations” they had saved, or were on the way to saving, the 13th and 14th monthly salaries in the private sector. Papandreou, whose credibility has already been shot to pieces, maintained a lower profile, while Papademos – to his credit – refrained altogether from engaging in this poppycock.

In the more sobering light of a wintry Athens morning and if reports are accurate, claims that red lines were drawn and wages ringfenced are worth no more than claims by card dealers on Adrianou that their games are not rigged.

While the leaders of Greece’s three coalition parties did not agree to the scrapping of 13th and 14th monthly salaries in the private sector, it seems they did accept a substantial reduction to the minimum wage. According to reports, the minimum wage – which currently stands at 751 euros per month (gross) – is to be slashed by 20 to 22 percent.

The first thing to note is that this will lead to the minimum wage dropping to between 585 and 600 euros per month before tax, meaning that someone in work could be earning as little as 470 euros per month after tax. In cities like Athens and Thessaloniki, unless there is a shift in the cost of living, it’s highly questionable whether these will even be subsistence wages.

Beyond that, the reduction would mean that the minimum wage will drop close to the level of the monthly unemployment benefit of 461 euros that Greeks receive for the first year they are out of work. This means unemployment pay will also have to be reduced; otherwise there will be no incentive for those out of work to take jobs on or just above minimum pay. Some reports have suggested it will fall to 369 euros.

Then, there’s the issue of pensions. A downward shift in salary levels means that social security contributions will also decline and there’s little doubt that pension payments will also have to be adjusted to sustainable levels.

However, perhaps we could excuse all this for the sake of snatching those 13th and 14th monthly salaries from the jaws of the troika. The fact they are paid in Easter, summer and Christmas does not make them holiday bonuses: these are about 15 percent of regular private sector salaries. So, surely safeguarding this chunk of Greeks’ wages and therefore preventing further damage to aggregate demand and exacerbating the recession is a true victory?

Here’s the problem, though. Private sector wages are regulated by the national collective contract agreed by labor unions and employers, or by sector-specific deals negotiated in the same way. Apart from the fact that the minimum wage provides the basis for the pay structure in these contracts (if the base drops by 20 percent, it stands to reason that everything else will drop by 20 percent as well), the deals remain in force even after they expire (metenergeia (continued effect) in Greek). So, if employers and unions fail to agree a new contract within six months of the previous one running out, the terms of the expired deal continue to apply.

What the party leaders are about to sign up to – again, if reports are correct – is the substantial reduction of the minimum wage and the abolition of the principle of metenergeia, or nachwirkung as its known in German law. In other words, if employers and unions manage to agree on new collective contracts, the baseline will be 20 percent lower than before, thereby affecting all the wage brackets above it. If the two sides don’t agree on new deals, employers will be free to negotiate individual deals with their employees. The basis for these agreements? The new, 20-percent-reduced, minimum wage.

While some of the political leaders will proclaim their role as saviors of Greeks’ hard-earned crusts by protecting the 13th and 14th salaries, it seems that all they have managed to achieve is swap a 15 percent reduction, which would have occurred if those monthly wages were lost, with a 20 percent one that will come with the slashing of the minimum wage and the terms under which collective contracts apply. Rather than two monthly salaries, Greek private sector workers are set to lose three.

The fact that some people are portraying this as a victory for their negotiating technique means that either they are woefully misinformed or, as is more likely, they are being intentionally duplicitous.

It’s too late for Greeks to do anything about this now. They are bound to pay for quite some time for the mistakes that they and the politicians they elected have made. The only thing they can do is make a mental record of the deception and recall that moment from the memory banks when they walk into voting booths at the next elections.

It was interesting, therefore, that Papandreou and Karatzaferis should both suggest that the term of Papademos’s administration, scheduled to end in April, might be extended even until 2013. After all, who out of the current crop of politicians would want to put themselves before the Greek public in the wake of such a cheap case of misdirection? Denying the public the chance to express its opinion on recent events would really complete the confidence trick.

Having vacationed in Greece numerous times, let me tell you, 400 euros or less a month is poverty, especially in Athens. Some of the austerity measures are stupid and counterproductive.

As Greece nears its latest bailout, markets are yawning, for now. I agree with Aaron below, markets should be very nervous about what's going to happen in Greece and the repercussions. We'll find out soon enough if the market has "completely discounted" a major Greek default. No matter what they announce in Athens, be prepared for a major risk ON or OFF reaction.

Bill Curry of the Globe and Mail reports, Ottawa looks abroad for OAS pension solutions:

The Conservative government is looking abroad to find the best way to phase in a higher qualifying age for Old Age Security.

Human Resources Minister Diane Finley argued Sunday that Canada is one of the only countries in the 34-member Organization for Economic Co-operation and Development that isn’t already raising their retirement age.

Ms. Finley was asked directly on CTV’s Question Period whether the government’s plans would see Canadians having to wait until age 67 – rather than the current 65 – in order to qualify for Old Age Security.

“That’s one option. But let’s look at it. It used to be people were expected to have a life expectancy [of] between 68 and 71. Now it’s 81, and they’re still expecting to retire at the same age,” Ms. Finley said. “Almost all of the other countries in the OECD have already moved in this direction. The U.S. started doing this a little close to 20 years ago.”

Ms. Finley, 54, continued the government’s practice of offering hints at the government’s pension reform plans without specifically spelling out when the change would take effect or what it will involve.

“What I’m saying is that in terms of implementing it, we’re not going to tell people that they have to adapt within two years to a dramatically different model. … We’re going to make sure that people my age and younger have time to adjust their retirement plans,” she said.

Alice Wong, the Minister of State for Seniors, told the House of Commons last week that more information on the changes will be in the 2012 budget. The date of the budget has not been announced.

The federal government paid for a research report that summarized what other countries are doing in terms of raising the eligibility age of retirement programs. The October, 2010, report described Canada as an outlier.

“Canada stands out among the OECD countries in not having in place explicit plans to increase the age of eligibility for public pension plan benefits,” states the report, titled Age of Pension Eligibility, Gains in Life Expectancy, and Social Policy, prepared by researchers at McMaster University.

The report includes examples of what other countries are doing:

The U.S. passed legislation in 1983, gradually raising the eligibility age for social benefits by two months each year for five years. The age reached 66 in 2008 and will hit 67 in 2025.

Germany will increase its normal pension age from 65 to 67 between 2012 and 2029

The United Kingdom will raise the age for full pension benefits for women from 60 to 65 by 2020, and the age for both men and women will increase from 65 to 68 over a 22 year period starting in 2024.

Denmark, Finland, Portugal and Sweden have all linked benefits to gains in life expectancy.

The report concludes by recommending that Canada also bring in gradual and modest increases to the eligibility age, predicting it would moderate the inevitable decline in the size of the labour force relative to the size of the retired population. The authors say it would also make it possible to reduce the amount of taxes levied by the government to fund the public retirement income system.

The report’s recommendations are in contrast to another report to Ottawa that found “there is no pressing financial or fiscal need to increase pension ages in the foreseeable future.” That report, by OECD pension expert Edward Whitehouse, noted that a higher pension age could however be used to augment the value of benefits.

If Canada is also planning changes that won’t take effect for years, that may ease some of the heat the government is currently feeling over the issue. However a longer timeline also means the issue could play out during the next federal election campaign, which is expected in 2015.

The opposition NDP and Liberals have been highly critical of the Conservative plans to change OAS since they were first hinted at by Prime Minister Stephen Harper in Davos, Switzerland, during a Jan. 26 speech to the World Economic Forum.

One heavyweight that stepped into this debate is the Bank of Canada's former governor, David Dodge, who hopes Harper steps up on pension reform:

When it comes to pension reform, David Dodge has seen this movie before – twice – but he hopes it ends differently this time.

Prime Minister Stephen Harper has refused to answer repeated questions in the House as to whether he is planning to raise the eligibility age for Old Age Security to 67 from 65, leading opposition parties to howl that he is refusing to come clean.

However, Mr. Dodge – the former governor of the Bank of Canada who was deputy minister at the Finance Department during the deficit-slashing mid-1990s – hopes the government does just that. Moreover, in an interview Friday, Mr. Dodge suggested Mr. Harper should take advantage of his majority government and even raise the age for the Canada Pension Plan, something other governments have shied away from, and which the current Conservatives say is not on the table and not necessary.

“At least since the mid-1980s we’ve known we were going to have to do something,” he said. “We knew that back in ‘97 when we did the revisions of the CPP. At the time the decision was we were doing so much to fix that adding one more layer – i.e. the gradual increasing of the age – was probably too much to bear. So, we didn’t do it, although we certainly talked about it, and the finance minister and officials at the time talked about it and realized we really should do it. But we didn’t because we were doing so much else.”

“So, quite frankly,” he continued, “we’re at least 15 years late in getting started in raising that age of entitlement for CPP, OAS and the normal expectation as to how long people would work in the private sector with private-sector pension plans. That’s absolutely clear, and because labour participation rates will start to fall later this decade, we’re up against the wall. It would have been a lot better if we’d done things in 97, it would have been even better if we had done things in 85 when we first looked at this under the Mulroney government, because you need a long phase-in.”

Leaving the CPP aside, the cost of the OAS program is poised to soar as the baby boom generation retires, which is starting now. Other governments saw this coming, but ultimately backed down from plans to tackle the problem. In particular, when Tory Prime Minister Brian Mulroney partially de-indexed the program from inflation in his 1985 budget, he was famously accosted by then-63-year-old protestor Solange Denis, who fumed “You lied to us.” A week later, Mr. Mulroney reversed the decision, which he called “a mistake.”

Twelve years later, then-Liberal Finance Minister Paul Martin won over Ms. Denis – even to the point of dancing together for the cameras – for his proposed revamp of the OAS in 1996. Mr. Martin planned to replace the OAS and the Guaranteed Income Supplement for low-income seniors with a Seniors Benefit based on family, rather than individual, income. The fury came from others however, and Mr. Martin also backtracked.

Mr. Dodge is warning the Harper government against wasting another opportunity to start the clock on addressing a fiscal problem that everyone has known about for decades.

“There’s nothing, absolutely nothing new here, other than the fact the prime minister spouted off when he was standing among the great and the good over in Davos,” Mr. Dodge said, referring to Mr. Harper’s speech at the World Economic Forum in Switzerland last week, when he indicated he intends to tackle some of these issues.

“This has been in the literature, it’s been well understood for a long period of time. This one is in my mind (a) overdue, and (b) there’s a lot of noise that is pretty stupid, quite frankly – and maybe even politically stupid – coming out and saying, you know, ‘We can’t ever contemplate raising that age.’ All you have to do is remind people that originally it was age 70, and that was when people had a lot shorter life expectancy than they have today.”

Of course, for elected officials there is a big difference between recognizing the gravity of a problem and having the political will to take the actions that top bureaucrats recommend. Mr. Dodge has the battle scars to prove it, having served as Mr. Martin’s deputy. So, does he think the Harper government will break the mould?

“Generally, things that are not necessarily popular are done under majority governments,” Mr. Dodge said. “So I would hope they get on with it and do it.”

And what of the inevitable criticism from opposition parties, which could stalk the government all the way into the next election campaign?

“I would just hope that not everybody on the opposition side of the House is crazy,” he said. “There’s lots of people there that understand full well that there’s a big problem here.”

David Dodge is right, time to get on with pension reform. But it's more pressing than just raising the retirement age. We need a 'radical rethink' of our pension system which I already alluded to when I went over Prime Minister Harper's speech at Davos:

• Increase the retirement age to 67 (people are living longer; some economists think we need to raise the retirement age to 70)
• Review cost-of-living adjustments (COLAs) and cut when necessary
  
• Scrap all private companies' defined-benefit plans and consolidate them into a few large public defined-benefit (DB) pension funds. Companies should focus on producing goods and services, not managing pensions.
  
• Consolidate all municipal and city pension plans into large public DB plans
• Consolidate all Crown corporations DB plans into one large DB plan
• Expand CPP to all Canadians and get the funding right
• Cap CPPIB and all large public DB plans at a certain size and create new ones as needs arise
• Make pensions portable so no matter where people work, their pensions are safe, secure, well managed and will follow them
  
• Last but not least, get the governance right and improve it continuously.

Canadians whining over an increase in retirement age are wrong but so are others who think that this is the only adjustment needed to bolster pensions.

Let me be more blunt: we need to get our collective heads out of our asses, stop fear mongering, stop peddling to interests groups, and start getting on with some serious pension reform which introduces common sense measures and builds on the success of our large defined benefit plans.

I'm tired of watching interests groups from all sides of the political spectrum cry, scream, bitch and whine about pension reform. Wake up already, look what's going on in Europe, especially in Greece where partisan politics has destroyed the country. Having escaped the carnage that has rocked other nations, we've been lucky in Canada, but our good fortune could change at any time and we better be prepared.

Finally, don't be scared of working past 65. Work is good for you, it's healthy. It keeps your mind young and sharp. I see my 80 year old father working 10 hour days as a psychiatrist and he never complains. Admittedly, he's lucky, he's healthy, loves his job, his colleagues, and feels good helping mentally ill patients. Wish more Canadians had his attitude when it comes to work. Below, Canadian politicians doing what they do best, screaming at each other. Absolutely pathetic.