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.

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