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"WOULD YOU TELL ME, please, which way I ought to go from here?"

"That depends a good deal on where you want to get to," said the Cat.

"I don't much care where—" said Alice.

"Then it doesn't matter which way you go," said the Cat.

"—so long as I get somewhere," Alice added as an explanation.

"Oh, you're sure to do that," said the Cat, "if you only walk long enough."

That passage from Lewis Carroll's Alice's Adventures in Wonderland, recreated as an illustrated wall hanging, is a conspicuous presence in Leo de Bever's otherwise bare Edmonton office. "It epitomizes a lot of what goes on in the investment industry," explains the ashen-voiced chief executive of the newly formed Alberta Investment Management Corp. (AIMCo). "We chase benchmarks that have no relevance for our clients. People are so focused on their benchmarks that sometimes they confuse what's really important."

Nobody could accuse de Bever of lacking a clear purpose. His task is to take $71 billion that used to be managed by Alberta Finance on behalf of six pension funds and several government endowments and investment accounts, and build around it a sophisticated, independent asset manager that takes the risks—and produces the higher returns—that were lacking when the bureaucrats were in charge. De Bever figures it will take him five years to do that, while simultaneously establishing AIMCo's freedom from government—much like the Ontario Teachers' Pension Plan, which he helped develop into a world-class fund. "The government wants AIMCo to be a symbol of what Alberta can do," he says. "Five years from now, if this organization functions well, has some depth, if I can replace myself and senior staff who are my vintage, I think we'll have done the job that I came here to do."

After years of debate and two false starts, the Alberta government has shown it's ready to make that happen. It established AIMCo on Jan. 1, 2008, and put in place a board composed of leading business figures, including former TD Bank head Charles Baillie as chairman. The board tapped de Bever as AIMCo's CEO—a job he'd turned down once before, when the fund was still under provincial control. "What the government has done has been courageous in a political sense," de Bever says of AIMCo's creation. "Governments are all about not making mistakes, about not taking any risks that can come back to bite them. There is a fundamentally different culture in an organization like this."

De Bever is now seven months into a job that couldn't have started at a worse time. Capital markets are lurching sickeningly, and giant institutional investors have been particularly hard hit: Endowment funds for Yale and Harvard, as well as the California Public Employees' Retirement System, saw their portfolios slashed by 20% to 30% in the last half of 2008. Canadian pension funds, meanwhile, took a record tumble last year, losing 15.9% overall, according to RBC Dexia.

AIMCo, one of Canada's largest capital pools, is in a stronger position: When the price of oil skyrocketed, the province's take from non-renewable resources, which averaged $11.6 billion in each of the last two fiscal years, accumulated in low-risk, fixed-income assets. "We have more liquidity than most funds," de Bever says.

Still, transforming AIMCo now "is like trying to put a roof on a house in the middle of a hurricane," he acknowledges. "Some members of my staff are nervous. They're saying, 'How are we going to execute this vision you have in the middle of all this doom and gloom?'"

Middle of it? In Alberta, the doom and gloom has barely begun. The price of oil is down by roughly $100 (U.S.) a barrel since its peak last year. And a growing number of critics are convinced the government has lost its way, having relied too heavily on its resource revenues to fund government spending and failing to salt away enough cash during the good years. "If you're smart, you forgo some prosperity in order to gain future stability," says Allan Warrack, a former cabinet colleague of Conservative Premier Peter Lougheed and business professor emeritus at the University of Alberta. "Economic strength is not just prosperity, but stability. We in Alberta not only didn't do that—we made it worse."

The touchstone of their concern is the single largest pool of money under de Bever's control: the Alberta Heritage Savings Trust Fund. The fund was established 33 years ago to store up oil profits for the benefit of future generations. But successive Conservative governments first stopped funding it, then began skimming its profits. As of Sept. 30, it stood at $15.8 billion—20% lower than it was 20 years ago (adjusted for inflation). Now, with resource revenues poised to fall sharply and remain depressed for the next few years at least, Alberta could soon face humbling fiscal challenges it should have headed off when times were rosy. By the time de Bever has fixed AIMCo, the province could very well be mired in a full-blown fiscal crisis on par with that of the 1980s—leaving it no choice but to tap the Heritage Fund or run up massive deficits. It's hard to believe, but Alberta, the Wonderland of Canada—with its oil sands, no sales tax and debt-free balance sheet—has pissed away another oil boom.

This could put de Bever in a difficult position. "All I control is the money that they give me to invest," he says carefully. "Obviously I may have some views on [growing the Heritage Fund], but that's not relevant. I've been given a set of money, and I manage it as best I can."

Baillie, for one, hopes that de Bever emerges as something more than that: the man who saved Alberta from itself. "It's up to Leo and the board to convince the government to put more money into the Heritage Fund and leave it there," Baillie says. "I think we'll see him used as an adviser to the government on issues broader than investing."

IN A PROVINCE OF BIG personalities and ostentatious displays of success, the 60-year-old de Bever cuts a low profile. With his mussed and greying hair, boyish face, expressionless voice and a deeply creased shirt that suggests he's been living out of a suitcase (he flies home frequently to Toronto to visit his wife, Anne, who has heart trouble), he resembles a cerebral grad student. In fact, he looks very much like the economics PhD candidate he was at the University of Wisconsin, before he landed a job in the research department of the Bank of Canada in 1975. The content matches the appearance. De Bever is a thoughtful, genteel man with a straightforward manner, always eager to impart the best of what he's learned from books or discovered for himself. "I'm never dogmatic about much of anything," he says.

At Teachers, where he served as senior vice-president for 10 years, the Dutch-born de Bever earned a reputation as a prescient, creative strategist, and then-CEO Claude Lamoureux gave him considerable freedom to develop the fund's risk-management system into one of the most formidable and sophisticated tools in Canadian pension management. His team explored the potential performance of investments, then adjusted the numbers to take into account downside risks, to provide a more realistic outlook. His approach unearthed some intriguing opportunities, including timberlands and infrastructure, long before they became popular with other funds. He's also the guy who persuaded Teachers to pull back from equities in 1999, just before the tech bubble collapsed.

"He likes his freedom, to have the scope to explore what he likes to do," says former Teachers chairman Robin Korthals. "That's a fairly strong characteristic in him. So you have to build around that a little bit."

De Bever's the first to admit he's no stock picker, but rather an overall portfolio strategist; he once posited to Teachers' skeptical board that if you were right with your investment decisions 53% of the time, you would consistently rank among the top quarter of investment managers.

But while de Bever thrived in Teachers' freethinking environment, what he really wanted was to be the chief investment officer or CEO. Those jobs weren't open, so in 2004, he left to manage a $90-billion portfolio at Manulife Financial. Several colleagues advised him not to go. "I didn't think it was a good move for him or that he'd get the scope he wanted there," says Korthals, a past Manulife director.

Korthals was right. Shortly after joining Manulife, de Bever had a chance to buy $1 billion worth of timberlands. Dominic D'Alessandro had other ideas. "It became the greatest transaction I never did, because I could not swear to the CEO on a stack of two-by-fours that no one had gone out in the dark of night and dumped PCBs in a million-acre forest," thus contaminating it, de Bever says. "Some of the assets I managed were on the edge of the Manulife comfort zone."

His stint at Manulife lasted two years. In 2006, he was lured to Australia, where the Victorian Funds Management Corp., a large public pension fund, had offered him the CIO post. There, he hoped to recreate the Teachers model, but was ultimately thwarted by a cautious state bureaucracy. This time, de Bever lasted less than two years.

With AIMCo, he has found a better fit. After years of prodding from various sources, the Alberta government decided in 2007 to hand the investments under its charge to an arm's-length, professionally managed and governed agency. The plan is to build on de Bever's success at Teachers—but to do more than simply mimic the Ontario fund, whose forays into "alternative assets" such as buyouts and hedge funds allowed it to post above-average returns. "When I got hired, the board thought we would simply replicate the alternatives that Teachers and other funds were investing in," says de Bever. "And I made it very clear from the very beginning that we may have to invent our own alternatives. Whatever worked in the last 10 years may not be a sweet spot" in the next decade. "The main thing we're imitating from Teachers is the basic philosophy of always looking for the best thing," he adds.

In Alberta, Finance had done a decent job of managing assets, earning an average of 0.66 percentage points above its benchmarks over the past eight years. But its results could have been much higher under an independent, active manager, says Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, who advised the government on the creation of AIMCo. "It was such an obvious no-brainer," he says. "This has been a good idea for 20 years."

De Bever has two challenges: freeing AIMCo and fixing it. "Taking AIMCo out of a government department is a very complex exercise and inevitably creates some friction over who is responsible for what," says de Bever. Luckily, Alberta Finance Minister Iris Evans "has been only a phone call away to help us resolve the really tough issues, and we are working out a process to amicably resolve the rest."

For example, he's pushing to disentangle AIMCo's budget from the overall provincial budget, to give him the flexibility to pay his managers according to performance. AIMCo couldn't even open its own bank accounts until recently. And de Bever's staff will leave their government building for new downtown digs in 2010. Evans is on board with the changes. "For the longer term, I think a much more independent secretariat and corporate management group is more appropriate," she says. "They would like that independence and view that as essential for the longer term, and I have no difficulty with that."

As for rebuilding AIMCo, de Bever is bulking up with some big hires, including two former Teachers executives: Brian Gibson will head the equities department, and George Engman will lead direct private equity investments from a new satellite office in Toronto. De Bever's first priority, however, is to hire 30 or so computer nerds and operations experts, and install cutting-edge IT and risk systems to replace AIMCo's badly outdated technology. "If you operate without it, you risk making big mistakes," he says. "If I ask now, 'Find me our exposure to Citigroup,' it takes one to two hours. I'd like to get to a point where you press a button and an answer spits out. In a crisis situation, that's what you need."

De Bever also wants to see if more of the 25% of investments AIMCo farms out to expensive outside managers can be brought in-house cost-effectively. And with Engman's help, he plans to build AIMCo's capability to invest directly in private equity (and other alternative assets), rather than taking the passive route of simply plowing money into outside funds.

To get there, he's encouraging his 90-person investment team to think more broadly than just real estate and infrastructure. After all, the cutting-edge "alternative" investments of the next few years could look different—say, private equity funds that invest in distressed debt. He's already persuaded the government and AIMCo's various pension funds to drop specific investment instructions—such as the rule that sets a definitive percentage of assets to be invested in equities—and instead set a risk tolerance level that he can broadly manage to.

So far, the clients are pleased. "We thought there was a lot of unrealized potential there that could be unlocked, and I think that's happening," says Ron Liteplo, CEO of Alberta Local Authorities Pension Plan Corp., which accounts for $13.4 billion of AIMCo's assets.

UNFORTUNATELY, ALBERTA WILL need more than a tidy overhaul at AIMCo to right its financial picture, as evidenced by the state of the Heritage Fund created by Premier Peter Lougheed in 1976. Alaska's equivalent fund is now more than twice the size of Alberta's—plus it pays regular dividends to residents. Norway's resources-fuelled Government Pension Fund is 20 times larger, though, to be fair, the country's oil resources are close to fully tapped.

The dismal state of the Heritage Fund is seen by many here as the result of years of mismanagement by successive Conservative governments. "In some ways, they've had a bit of a bad rap, and in some ways, they deserve a bad rap," says Jack Mintz, founder of the University of Calgary's School of Policy Studies. A recent government commission, chaired by Mintz, calls on the province to grow the fund to $100 billion by 2030 from just under $16 billion now. "Alberta should not look like a ghost town in the next century when the resources are depleted," the commission's report says.

The long decline of the Heritage Fund began just six short years after its creation. The Lougheed government originally kicked in 30% of resource revenues, but cut that in half in 1982 and began to withdraw all the fund's profits as oil prices fell. Premier Don Getty stopped the contributions altogether in 1987; governments from 1982 to 2005 didn't top up the fund for inflation. "The grandchildren's money was hived off to support the government," says Warrack, who has written critically about the fund for years. "The government wasn't wrong to take some money out when it needed it; it was wrong to take out all of it."

Ralph Klein inherited a province in 1992 that had Canada's highest deficit per capita. He slashed spending, tamed the deficit and retired the debt a year before giving way to Ed Stelmach in 2006. But Klein's actions further entrenched the government's dependence on resource revenues. From 1998 to 2007, royalty revenues and income from the Heritage Fund accounted for an average of 31.1% and 6.3%, respectively, of government revenues. When oil prices rose, the government ramped up spending and cut every Albertan a one-time $400 cheque. In the past three years, spending per capita in Alberta has risen an average of 9.6% per year, says credit rating agency DBRS—almost two points ahead of second-place Newfoundland and Labrador. Alberta's budget this year equals $10,841 per resident, behind only the Rock.

To compound the province's woes, the government has forgotten how to save. This fiscal year, with a record $14.6 billion in forecast resource revenues, Alberta has committed nothing to the Heritage Fund, instead allotting $2 billion each for public transit and underground carbon storage. Treasury Board president Lloyd Snelgrove last November said his constituents wanted more infrastructure spending, rather than having to "count on a bunch of money in a bank somewhere to live off sometime down the road when, apparently, it might rain."

That stance is foolhardy. Boomers are retiring, and the Conference Board of Canada forecasts Alberta's health-care spending will increase by 2% to 3% annually from now through 2024-'25. Meanwhile, production from mature conventional oil and gas reserves in Alberta is declining, and it will take years for revenue from the province's vast oil sands reserves to replace them—particularly with the rash of recent project cancellations and lower oil prices. Alberta's controversial 2007 increase in royalties won't staunch that decline: The Alberta Royalty Review Panel has estimated that, even with increased royalties, annual resource revenues would decrease by one-third, to $7.6 billion, between 2006 and 2016. And that was before the meltdown.

It all adds up to a rapidly deteriorating fiscal picture. According to the Mintz report, Alberta could end up with a $5-billion deficit in 2016, and $10 billion three years later. In short order, the province's $36 billion in net assets could vanish. With revenues declining and spending rising, Alberta would have to raise taxes by an astounding 8.1% per year from 2012 to 2030 to avoid running deficits.

Growing the Heritage Fund could mitigate that. Warrack says it should be managed like an endowment, with a fixed amount of about 4.5% of assets disbursed to government annually.

To get to $100 billion isn't complicated: All the government has to do is let AIMCo reinvest the fund's profits and contribute $1 billion annually through 2030. All that de Bever and his successors have to do is earn 7% a year (under Finance, the fund has averaged an 8.2% return since 1983).

First, the government must stop raiding the fund's profits and find that $1 billion a year. It doesn't sound promising. "If we put money in the Heritage Fund and built dollars rather than capacity and knowledge-based industries, I think we wouldn't be doing the right thing for our future," says Finance Minister Evans. "We can plan for all the savings strategies in the world. But like any financial manager, you have to feed your family first and then salt away what you can. Everybody says, 'Well, put it in the bank first.' Well, not at the expense of public services."

Though de Bever is too careful to offer an opinion on how Alberta should manage its finances, one can only hope Charles Baillie's wish comes true, and that the government indeed turns to the fund's CEO for some sound advice. Because if its current attitude prevails, de Bever may some day find he doesn't even have a Heritage Fund to manage; the province will have cashed it all in. Perhaps then he can get a new Alice in Wonderland hanging, quoting the next page of the story:

"We're all mad here. I'm mad. You're mad."

"How do you know I'm mad?" said Alice.

"You must be," said the Cat, "or you wouldn't have come here."