Raymond Dalio doesn’t shy away from controversial issues. The 66-year-old billionaire has built Westport, Connecticut–based Bridgewater Associates into the world’s largest hedge fund firm by creating a culture of “thoughtful disagreement” since he founded it in 1975 and ran it out of his two-bedroom Manhattan apartment. “There are clients who appreciated us and clients who didn’t from the beginning because we just needed to talk about the things we needed to talk about,” says Dalio, whose firm manages $154 billion in assets, including $105 billion in hedge funds. In April 2014, Bridgewater needed to talk about the funding problem facing U.S. public pensions. “The severity of the problem is being severely underestimated,” Bridgewater wrote in its Daily Observations, read by thousands of investors and policymakers around the globe. The reason: Most pension funds assume they will be able to generate a 7 to 8 percent annualized investment return, much higher than Bridgewater’s estimate of about 4 percent over the next ten years. “At a 4 percent return, the funding problem will be catastrophically worse, with roughly 85 percent of public pensions going bankrupt within three decades,” Bridgewater wrote, based on the results of stress tests done by the firm. According to Bridgewater’s research, overseen by co-CIO Robert Prince, public pension funds will need to make $10 trillion in future retirement payments in the coming decades, but they have only $3 trillion in assets — necessitating a 9 percent annualized rate of return. Today’s low-return environment will impact all types of savers and investors, add Dalio and Prince, but all is not lost. Public pensions have three paths they can follow: They can try to generate higher returns by shouldering more investment risk, raise returns by taking on risk more efficiently through better diversification or accept the low-return environment and either contribute more money or reduce retirement benefits. Dalio says the first path is very dangerous. His firm has been trying to help pensions with the second option, creating better-diversified portfolios through its All Weather and Pure Alpha hedge funds. “Taking risks more efficiently through a diversified portfolio at the same risk as what you have now, you’d probably pick up about 200 basis points a year of return over time,” says Prince.