As negative interest rates spread from Switzerland, Japan and Germany to the rest of the developed world, people with money to invest face some life-defining issues.

Retirees who need to generate 6% to avoid dipping into principal can’t get there with bank CDs. Pension funds that have promised an 8% return in order to meet obligations to future retirees can’t get anywhere near that with government bonds. Same thing for insurance companies and money market funds, whose business models require positive returns with low risk.

This presents these guys with a stark choice: Become something radically different or cease to exist. In effect, they have to become hedge funds.

A retiree, for instance, can either stop being a retiree — that is, go back to work — on invest a lot more aggressively to meet the required 6% return. That means loading up on equities and junk bonds, either blithely because she doesn’t know what they are (only that they’ve been going up) or with trepidation because she’s aware that every five or so years these things tend to crash.

Public companies are finding that investing in their current business doesn’t pay nearly as well as borrowing money and using the proceeds to buy back stock. Pension funds, meanwhile, have more options, though the end result is the same. They can, like our hypothetical retiree, load up on equities, as Japanese pension funds are reportedly doing…

Japan Pensions Sell Record $46 Billion Bonds to Buy Stocks

(Bloomberg) — Japan’s public pension funds, which include the world’s biggest, accelerated their push to dump local bonds and invest the money abroad to a record pace.

The $1.1 trillion Government Pension Investment Fund and its smaller peers almost doubled net sales of Japanese government bonds to 5.56 trillion yen ($46 billion) in the fourth quarter, the most in Bank of Japan figures dating back to 1998. They bought an unprecedented 2.39 trillion yen of foreign stocks and bonds. Selling of JGBs and buying of overseas securities has continued for six straight quarters.

GPIF posted its largest investment gain in almost two years last quarter after shifting more money into stocks from Japanese bonds, as it came under government pressure to boost returns to cover payouts for the world’s fastest-aging population. The Federation of National Public Service Personnel Mutual Aid Associations, last month said it will boost its investments in foreign stocks and bonds and cut exposure to domestic debt, matching the plan by GPIF.

…or they can wander even further into the “alternative” investing universe by hiring hedge funds to generate “alpha.”

(New York Times) — Another year, and another mediocre performance by hedge funds, to put it kindly. The Barclay Hedge Fund Index gained a meager 2.89 percent in 2014, while the Standard & Poor’s 500-stock index gained over 13 percent and the Barclays United States Aggregate Bond Index rose over 5 percent.

In the world of aggressive investing, retirees, corporations and pensions funds are all “dumb money.” They don’t this kind of thing regularly so they have no institutional or personal experience to draw upon. The result, for pension funds and retirees, is the quintessential beginner strategy of trend following, buying what was hot last year because that’s where the biggest returns are being generated, while public companies are being even dumber, buying stocks on margin without regard for valuation.

This also happened in the last bubble, when individuals became real estate speculators, pension funds embraced alternative investments, and corporations ramped up their share repurchase programs. All got creamed in 2008. Will this time around be any different? Definitely. It will be much worse because the numbers are so much bigger.

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