UK - Watson Wyatt has cautioned pension funds against quantitative managers following the "strong tailwind" the sector has experienced over the past five years.

In a circular to its clients, "Quant management at an inflection point", the consulting firm pointed out there had been an explosion in hedge funds within the quantitative management space, including the 130/30-type flexible products in the last few years.

But it warned returns from some quant managers have been weaker recently, with some poor performing funds forced to de-risk and de-leverage. Although many quant managers are claiming the fall as a one-off "technical" event, the firm has suggested other issues could make it harder for quantitative funds to repeat their past performance.

For example, Watson Wyatt suggested, as the valuation spreads between traditional value and growth stocks has narrowed, the number of "obvious opportunities" for these funds has decreased, while increased volatility in certain sectors could result in a "more difficult environment" for some quant strategies.

Watson Wyatt admitted quantitative managers do have some advantages over fundamental managers, such as objectivity, intuition and the ability to process large amounts of data quickly, but suggests a correlation exists between the types of factors used by various managers, so in a more "risky" environment any significant withdrawal of quant funds could impact all managers.

In addition, the consultant revealed models can use backward-looking data, and could struggle with structural changes and the cyclicality of the economy, industries or company so quantitative models are "generally not good at points of inflection" and can also suffer in markets where there are no clear trends.

"We remain cautious in the outlook for quantitative mangers generally, given the strong tailwind many have experienced and are increasingly nervous about all the 130/30 products being launched," said Watson in its circular.

That said, it suggested if the recent events in the market result in less money being managed in a quantitative way, it would "likely lead to a better environment for these managers". 

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