The notion that a traditional 60/40 portfolio offers meaningful diversification has long been questioned by practitioners. When implementing the Total Portfolio Approach at Danish pension fund ATP in the early 2000s, Bjarne Graven Larsen and his team observed that, despite diversified allocations, much of the underlying risk remained driven by equity exposure. That insight later formed the foundation for Qblue Balanced and its Alternative Risk Premia (ARP) strategy, developed by former ATP colleagues to provide investors with complementary sources of return beyond traditional market risk, especially in risk-off environments.
“If you can find a new source of returns that is not correlated with the 60/40 portfolio, you can increase your Sharpe ratio significantly,” says Graven Larsen. The relevance of this approach became particularly evident in 2022, when traditional portfolios failed to diversify and major asset classes declined in tandem. That environment highlighted how dependent many portfolios remain on a limited set of return drivers, leaving investors exposed when those drivers move in the same direction.
“If you can find a new source of returns that is not correlated with the 60/40 portfolio, you can increase your Sharpe ratio significantly.”
Bjarne Graven Larsen
Launched in mid-2019, the Qblue Alternative Risk Premia (ARP) fund employs a multi-strategy systematic approach designed to capture risk premia across equities, fixed income, commodities, and currencies. “The strategy is not a quant black box, but rather is founded in economic relationships driven by behavioral biases and other factors,” explains Lars Hougaard Nielsen, who co-heads the investment function alongside Co-Chief Investment Officer Martin Richter. In terms of return characteristics, the fund is designed to “target returns that are uncorrelated to bonds and equities, especially uncorrelated during stressed markets.”
“Risk Premia,” A Catch-All Term
The strategy draws on ten in-house developed alternative risk premia across four asset classes, with roughly half of the exposure linked to equities and the remainder to commodities, fixed income, and currencies. While “risk premia” is often used as a catch-all term for systematic return drivers, its meaning varies significantly depending on implementation and portfolio construction.
“When we say risk premia today, most people think about momentum, value and other premia,” says Graven Larsen. While the Qblue ARP fund incorporates these well-known factors, its approach differs in both implementation and portfolio construction, with a greater emphasis on diversifying return drivers beyond traditional equity-centric premia. “As a practitioner, I find broad labels such as momentum or value somewhat outdated,” says Nielsen. “The return characteristics and what you are trying to capture ultimately depend on how the strategies are implemented.”
“As a practitioner, I find broad labels such as momentum or value somewhat outdated. The return characteristics and what you are trying to capture ultimately depend on how the strategies are implemented.”
Lars Hougaard Nielsen
While implementation is a key differentiator, continuous evolution and refinement are equally important. Internal research conducted by the team in 2018 showed that static strategies tend to experience return decay over time. “A value algorithm may appear robust in backtests, perhaps delivering a Sharpe ratio of 0.8 on a standalone basis,” recalls Graven Larsen. “But over a 10-year period, that can decay to below 0.4 if you don’t actively evolve the strategy,” he explains. In some cases, he adds, “two to three out of ten strategies may see their Sharpe ratios decline to zero over time.”
“A value algorithm may appear robust in backtests, perhaps delivering a Sharpe ratio of 0.8 on a standalone basis. But over a 10-year period, that can decay to below 0.4 if you don’t actively evolve the strategy.”
Bjarne Graven Larsen
This dynamic underpins Qblue’s philosophy of continuous innovation and refinement. Rather than relying on static models, the team focuses on consistently improving and adapting its strategies to maintain their effectiveness.
Designed for Stress, Not Just Normal Markets
While the design of individual strategies is important, their interaction within a portfolio is equally critical. In particular, correlations between strategies, and how they behave across different market environments, play a central role in determining overall portfolio resilience. Nielsen, who spent six years at ATP developing alternative risk premia strategies, observed that strategies appearing uncorrelated over time often became highly correlated during periods of market stress.
“What we found was that in times of real market stress, particularly during financial crises, strategies that appeared uncorrelated were not uncorrelated after all,” recalls Nielsen. “The fact that you’re uncorrelated on average doesn’t necessarily mean that will hold in stress scenarios, because market dynamics always change,” he adds. “It’s been deeply rooted in our DNA to build something that is not just uncorrelated on average, but especially uncorrelated when markets are stressed.”
“It’s been deeply rooted in our DNA to build something that is not just uncorrelated on average, but especially uncorrelated when markets are stressed.”
Lars Hougaard Nielsen
As a result, portfolio construction focuses not only on diversification in normal conditions but also on maintaining low correlation in tail events. The Qblue ARP fund allocates a significant portion of its risk, around 50 percent on average, to strategies designed to perform in risk-off environments. “We want to make sure that we have sub-strategies inside the ARP fund that perform well in these risk-off scenarios,” emphasizes Graven Larsen. “At the fund level, we don’t just aim to optimize each strategy on a standalone basis, but to ensure that the overall portfolio remains uncorrelated, including in tail events.”
Over its seven-year history, the Qblue ARP fund has demonstrated resilience during periods of market stress, reinforcing its role as a diversifier. During the five most significant equity drawdowns, the fund recorded losses in one instance, was flat in another, and delivered positive returns in three. “Looking at more recent events, such as the market reaction in March following the escalation in the Middle East, we also delivered positive returns.”
“What I’m most proud of is how we’ve been able to deliver solid performance during stress scenarios, because that’s much more difficult.”
Lars Hougaard Nielsen
As a financial engineer by training, Nielsen takes greater pride in the strategy’s performance during risk-off environments than in strong returns during benign market conditions. “What I’m most proud of is how we’ve been able to deliver solid performance during stress scenarios, because that’s much more difficult,” he says. “It’s relatively easy to generate positive returns when markets are rising. What investors are really looking for is something that diversifies when markets are under pressure.”
Dynamic Allocation and Risk Management
The allocation to individual strategies is guided by long-term return and correlation expectations, combined with continuous monitoring of how these relationships evolve over time. “The backbone of our allocation process is long-term correlation and return expectations,” explains Nielsen. “We use those inputs to construct the portfolio through an optimization framework.”
The optimization aims to balance expected returns, diversification, and overall risk characteristics. At the same time, the team remains mindful of the instability of correlations. “Correlations are not stable over time, so it’s difficult to be overly aggressive in reallocating based on short-term changes,” notes Nielsen. “That said, we do monitor shifts closely, and in certain cases, when changes become more pronounced, we adjust the weights accordingly.”
A Complement to Traditional Portfolios
Looking ahead, the team continues to focus on evolving the strategy to mitigate alpha decay and improve its forward-looking robustness. “It’s a better portfolio from a forward-looking perspective than it was in the past,” argues Graven Larsen. “When we try to change things or when we see new things we try to implement, we think of how to build it to be better positioned for the future,” he explains. “It’s not so much about tryting to improve the back-testing result, it’s not a data mining game.”
By design, the Qblue ARP fund aims to diversify traditional equity and bond allocations. While the strategy may not keep pace during extended, “exuberant” equity bull markets, it is positioned to perform when markets correct or reprice risk. “When there’s a reality check in equity markets, that’s typically when we tend to do really well,” says Graven Larsen. “In normal markets, we do well, and in negative markets, we tend to do even better.”
“The lessons from 2022 showed that correlations between traditional asset classes do not always provide the diversification investors expect, in some cases, they can work against you. So the key question becomes: what can you do differently?”
Bjarne Graven Larsen
Investor demand for such strategies appears to be increasing. Based on ongoing discussions with clients, Graven Larsen sees a growing appetite for solutions that can diversify equity exposure, particularly in an environment of elevated valuations. With Qblue expanding its presence, including the opening of an office in Singapore, the firm is positioning itself to meet that demand. “The lessons from 2022 showed that correlations between traditional asset classes do not always provide the diversification investors expect, in some cases, they can work against you,” Graven Larsen concludes. “So the key question becomes: what can you do differently?”
