Yesterday, Watson Wyatt told its clients that it was getting a funny feeling about quant funds. According to one media outlet, the consultancy sent out a memo called “Quant management at an inflection point”, in which it “cautioned pension funds against quantitative managers” and said quants run the risk of having to “de-leverage” once again. The firm was less concerned about 130/30, saying it was “increasingly nervous”, but apparently stopping short of cautioning investors.
130/30 funds had a tough August to be sure, suggesting Watson Wyatt’s nervousness is not unfounded. But a closer examination of the story suggests that this case of nerves isn’t particularly significant. First of all, a large minority of 130/30 funds are fundamental, not quantitative. In addition, quant 130/30 funds don’t use much leverage (1.6x). So a “deleveraging event” would have a minimal direct effect (although de-levering by highly-levered funds using similar quant models could still hurt the 130/30 managers).
The point is that the story is about quant funds, not 130/30 funds per se. So we thought it was kind of funny that a passing reference to 130/30 made it all the way into the story’s headline (“Watson Wyatt ‘nervous’ over 130/30 funds”). Naturally, this prompted some other outlets to morph this from a quant story into a 130/30 story.
“…Mr. Baker [the report’s author] seems to ignore some of the factors behind the popularity of 130/30 funds among institutional managers, said Alan Mr. Glatt, a partner at New York-based Alpha Equity Management Inc., a hedge fund [firm] that specializes in 130/30 funds.
“One such factor is that 130/30 vehicles allow institutional investors to add alpha through their equity buckets, without having to solicit new hedge fund mandates and without the obligation to increase their allocations to alternative investments.
“I wonder why Watson Wyatt would not consider 130/30 funds as a better mousetrap for the long-only mandates,” Mr. Glatt said.
According to a hedge fund manager familiar with Watson Wyatt, ‘They [Watson Wyatt] never were big fans of quantitative strategies. They believe in fundamental long/short equity strategies. Also, they never were a proponent of 130/30 for their clients. They don’t believe in it.'”
On a related note, check out this January 2007 presentation by Watson Wyatt called “130/30: Holy Grail or Guaranteed to Fail.”