Reality Check: “130/30″ and “quant” not synonymous
Jan 23rd, 2008 | Filed under: 130/30Yesterday, 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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Even more confusion with language caused by this post.
“Fundamental” and “quantitative” are not mutually exclusive. Indeed, most of the quant 130/30 funds use a host of Fundamental factors, and even those that exclusively use Fundamental factors typically do so in a quantitative manner.
[…] All About Alpha looks askance at misleading headlines. addthis_url = ‘http%3A%2F%2Friskandreturn.net%2F%3Fp%3D154′; addthis_title = ‘130%2F30+Fear’; addthis_pub = ”; […]
[…] Yet the firm stopped short of recommending against 130/30 (see related posting) and in a webcast last October Watson Wyatt elder Roger Urwin declared that 130/30 had “breathed new life into asset management.” (see related posting) […]
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