Qblue’s Systematic Solutions to Investor Needs

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Stockholm (HedgeNordic) – After serving as the CIO of the Danish pension fund ATP and in a similar role at Ontario Teachers’ Pension Plan (OTPP), one of the world’s largest and most sophisticated pension plans, Bjarne Graven Larsen identified a common shortfall in most pension fund portfolios: a lack of diversification into genuine alternatives. This realization inspired the creation of Qblue Balanced, a fundamentally based systematic asset manager. The founding team of seven included former ATP colleagues, notably ATP’s CIO of investments, Fredrik Martinsson.

After many years in the role of CIO, “I had started to feel that I was becoming more of an administrator and moving further away from investments and from what I enjoy, which is solving tough problems and helping investors achieve their risk-return objectives,” recalls Graven Larsen. After leaving Ontario Teachers’ Pension Plan, Graven Larsen had a discussion with Fredrik Martinsson, former CIO of investments at ATP, that laid the foundation for Qblue Balanced.

“One of the reasons we formed Qblue was because we observed that many institutional clients are not well diversified in their portfolios,” says Graven Larsen. “While they may have a lot of different assets, both private and public, most are still heavily dependent on equity market performance and interest rate fluctuations. They might have diversified into alternative assets, but they haven’t truly diversified into liquid alternative return drivers,” he emphasizes. As a result, Qblue Balanced launched a market-neutral, multi-strategy liquid asset fund in 2019, followed by several products utilizing its equity factor toolbox with a strong sustainability overlay.

“One of the reasons we formed Qblue was because we observed that many institutional clients are not well diversified in their portfolios. They might have diversified into alternative assets, but they haven’t truly diversified into liquid alternative return drivers.”

Qblue Balanced positions itself as “a trusted long-term partner that helps investors solve problems,” according to Graven Larsen. “It’s in our DNA to sit down with clients, understand what they are trying to achieve, and leverage our experience to come up with a solution that might involve Qblue’s products.”

Qblue Alternative Risk Premia Fund

Despite describing Qblue Balanced as a systematic asset manager, “we are fundamentally based in the core of what we do,” emphasizes Bjarne Graven Larsen. “We always start with a fundamental meaning backed by solid research or a well-founded hypothesis that we can test and understand,” he elaborates, suggesting that logical economic relationships or behavioral patterns can be tested and modeled. Grounded in research and fundamental drivers, the Qblue Alternative Risk Premia fund operates as a liquid multi-strategy, multi-asset vehicle harvesting risk premia in several asset classes using a range of different strategies. However, this fund is more than a traditional alternative risk premia vehicle.

“We always start with a fundamental meaning backed by solid research or a well-founded hypothesis that we can test and understand.”

“When we launched Qblue, we implemented five market-neutral ARP-type of equity strategies. However, the product differs from what most investors typically think of as alternative risk premia funds,” says Graven Larsen. For instance, the Qblue Alternative Risk Premia fund seeks to capture a “harvest season spread” in commodity markets and employs two systematic macro strategies in the fixed-income/currency space: one focused on capturing monetary policy changes and another on capturing purchasing power trends in G-10 fixed-income instruments. “The fund is more diversified than most ARP vehicles, incorporates build-in tail risk protection, and serves as a diversifier to equity and bond-dominated portfolios.”

The product is designed to fulfill two primary objectives for investors: diversification and built-in tail risk protection. “It’s built to serve as a strong diversifier within an institutional portfolio, so we have spent a lot of time making sure it remains uncorrelated with both equity and bond portfolios,” notes Graven Larsen. The year 2022 provided a perfect illustration of the fund’s properties. Despite simultaneous downturns in both equities and bonds, the Qblue Alternative Risk Premia fund closed the year with a positive return of six percent. “We had to make sure that the strategy delivers on its own merits during challenging periods in equity markets, bond markets, or both.”

Equity Factor-Based Approaches with a Sustainability Overlay

After introducing its first fund in 2019, Qblue Balanced forged partnerships with Navigera, the fund management arm of Swedish insurance broker Max Matthiessen, in 2021 and later with London-based asset manager Heptagon Capital. These collaborations led to the launch of several new funds, all anchored in Qblue’s factor-based approach and complemented by a proprietary sustainability overlay. “These products use a systematic approach that relies on our five equity factors and our Sustainability CubeTM model,” says Graven Larsen. This combination enables us “to screen out some companies that we don’t like by favoring equity factors such as value, momentum, profitability, yield, and low risk, and selecting companies with a strong sustainability profile,” he explains.

Reflecting on his involvement with sustainability since 1999 when he joined ATP, Bjarne Graven Larsen underscores a critical observation from his career: “Many investors do not stand on a solid and well-defined platform for discussing sustainability.” Recognizing that sustainability creates potential value – rather than serving as a risk-mitigation tool, Qblue Balanced subsequently developed its proprietary Sustainability CubeTM framework that evaluates companies based on their contributions to societal value creation. “It’s an idea that the generation of societal benefits is what creates potential value from being sustainable,” explains Graven Larsen.

“We started exploring with the notion that companies demonstrating a strong profile in societal value creation are well-positioned to do well. Often, this aspect is not fully reflected in equity prices.” 

In addition to viewing sustainability as a risk consideration, the team at Qblue sought to uncover “alpha or potential investment ideas hidden in the sustainability space,” according to Graven Larsen. “Our approach was to identify proxies across a broad spectrum of sustainability factors that serve as indicators of societal value creation,” he elaborates. “We started exploring with the notion that companies demonstrating a strong profile in societal value creation are well-positioned to do well. Often, this aspect is not fully reflected in equity prices.” 

By integrating various sub-measures belonging to three dimensions: Climate Transition, ESG Industry Leaders, and UN Sustainable Development Goals, Qblue Balanced derives a Sustainability CubeTM Score. This structure offers insights into each company’s sustainability profile, facilitating comparisons both within and across industries and regions. However, Graven Larsen emphasizes the importance of considering companies with strong fundamental economic factors. 

“We want to be cautious when investing in companies lacking strong fundamental economic considerations,” he explains and adds “to be sustainable, you need to be around for the long term, and only profitable companies will be around for the long term. Profitability is therefore a necessary prerequisite for being sustainable.” Consequently, the investment strategy ensures a focus on selecting companies with robust sustainability profiles while also maintaining exposure to the five factors Qblue prioritizes.

Expanding into Credit

Drawing from its experience managing both cross-asset alternative premia strategies and equity-focused strategies, Qblue Balanced is currently gearing up to launch a climate transition-focused investment grade bond fund during the summer. Explaining the rationale behind this move, Bjarne Graven Larsen states, “Many investors are seeking ways to align with corporate net-zero goals while managing significant fixed-income portfolios. The only real or common option available to them is investing in green bonds.” However, Graven Larsen highlights potential drawbacks of green bond investing, noting, “This approach isn’t always ideal as it may from time to time lead to greenwashing and might not offer the desired returns as investors often pay a premium for access to green bonds.”

“The systematic aspect in fixed income differs significantly from equity investments, as the factors considered are different. We are using a systematic approach to identify the factors that drive outperformance.”

Hence, Qblue Balanced has devoted considerable effort to devising a capable of generating alpha, while simultaneously aligning with Article Nine climate transition principles in the fixed-income space, primarily through a systematic approach. “The systematic aspect in fixed income differs significantly from equity investments, as the factors considered are different,” explains Graven Larsen. “We are using a systematic approach to identify the factors that drive outperformance.”