Q&A with Adam Randall on the launch of Blue Orbit Asset Management

Portfolio managers spend all day analysing companies, estimating cash flows and especially the value of equity. Deep down all PMs want to start their our own company. In 2016 we were managing a systematic Australian small caps strategy at IFM, which was closed to new investors. IFM also had a fundamental small caps team, and they were also closed. I saw a clear opportunity for a new small caps manager, with strong values alignment with the institutional investors.

In late 2017 I was busy developing our small caps investment strategy when a mate asked me for some help with his own startup. His business is involved with satellite launches, and with my background I could help them from business planning through to modelling orbital mechanics. I was actually running small caps back tests on my desk PC while simulating multiple satellites on my laptop. I pencilled in the name Blue Orbit Asset Management and then had really good feedback from some of the super funds. They said it was a great differentiator and a reminder of my background.

"We are not looking for 100 clients, but are focused on fewer, deeper relationships."

Large institutions can help teams to quickly grow, but sometimes that can also limit them. There are minor things, like not waiting in line for IT, HR or legal support because another team has a big project. But the main thing is clients can ask us to customise a strategy for them, and if it makes sense for us then we can do it. We don't need permission from other teams or from an offshore committee. It also means that we can be very creative in solving problems. Boutique quantitative managers can be very nimble.

We are focused upon systematically generating alpha in inefficient markets. Our first product is a systematic alpha strategy that uses multiple alpha signals, some of them longer term, and others short term. We differentiate ourselves from other quants by being very transparent in portfolio construction and performance attribution. It means that clients have a very good understanding of how we are positioned, and how we are likely to be positioned in different types of market environments.

"We differentiate ourselves from other quants by being very transparent in portfolio construction and performance attribution."

Yes, we definitely have an upper limit on the funds we can manage in each strategy. For example, we spent a lot of time identifying the capacity of our Australian Small Caps Systematic Alpha strategy, which is $1Bn. The analysis balanced several competing dynamics, such as desired alpha, active risk, and various measures of stock liquidity. If the fund is much larger than $1Bn then alpha starts to decay quite quickly. We want our portfolio managers focused on generating more alpha, not protecting from illiquid trading, so are happy to set a reasonable capacity. Other strategies that we have researched will also have capacity limits placed on them.

"We want our portfolio managers focused on generating more alpha, not protecting from illiquid trading, so are happy to set a reasonable capacity"

The application of ESG factors to small caps stocks can be quite different to how it is applied to large, mature companies. Some of the smaller companies don't yet have revenue, so the focus of the board is generally much shorter term. Other companies in this space have been paying dividends for years, so they have had the time and resources to look beyond the immediate budget. Our approach is definitely not one size fits all.

The level of support from across the industry has been really amazing. I think that most people understand the massive barriers to entry in this industry, and how hard it is to get up and running. We have had people offering support from across the industry, prospective clients and advisors, data and system vendors, even competitors.

Quant investment might be a different application with different assumptions to aerospace engineering, but maths is maths. There are a few signal analysis techniques that we are looking to employ in small caps at the moment. My daughter is studying astrophysics at university, so I do get a kick out of discussing new concepts with her, or helping her approach a difficult problem.

My son's technical ability has progressed beyond my ability to coach, which is a little hard to admit. But of course strategy is a big part of cricket, so I like to think that his team-mates occasionally listen to some of my ideas.