Commodities
Having sizeable positions in key trends also requires freedom to change asset class and market weights – as well as overall risk levels – in response to the opportunity set. There are no preset caps for any asset class and commodities, including a hefty weighting in agricultural commodities, have often made up over one quarter of risk. Commodities could sometimes approach 35-40% of risk including synthetic markets where one or more legs are commodities.
Creating synthetic markets
Transtrend does not only trade individual futures, forwards and equity swaps, but uses two or more contracts to create synthetic markets that might be trading a spread or other combination between two markets. These multi-contract markets can sometimes be more precisely sensitive to certain factors driving trends than the individual ones.
Synthetic markets have reached 45% of risk and could easily go over 50%, though there is no specific target, and the definition of “synthetic” partly depends on how some trades are structured, which has changed over time. Some historical measures would have classified as synthetic some markets currently categorized as singular: “For instance, in the old days Australian Dollar versus Yen required two currency pairs and was classified as synthetic, but it can now be traded directly,” reveals de Boer.
Real world economic, political and environmental developments as well as models and markets inform the choice of markets and the development of synthetics. “We have devised combinations of commodities and bonds to create synthetic inflation markets that have been great for harvesting related trends. Synthetics can also be created to gain exposure to longer-running themes such as Brexit,” says de Boer.
Open architecture for asset classes and instruments
Transtrend does not always view traditional equity indices or even industrial sector groups as being best suited to trend following. Unlike many CTAs, Transtrend trades many single stocks on swap. Single equities can sometimes provide a unique factor exposure to a company – or may be primarily designed to obtain commodity exposure and substitute for an insufficiently liquid futures contract. “The macro team meets every two weeks to discuss potential developments and new market additions. Lithium is one example of a market rejected due to not having large and liquid enough futures, but equities of lithium miners were added to get exposure,” explains de Boer.
The breadth of instruments and synthetic combinations available to implement ideas means that many trends can be approached from several angles. “An oil trend could be directly expressed in at least three ways: the commodity future itself, energy equities, or certain currencies such as Norwegian Krona that are sensitive to the oil price. And any of these could also make up one or more legs of synthetic markets,” points out de Boer. Dedicated traders not only have some discretion over the timing of execution, but they can also have some choice over markets within a family of related order advice. “Asset class definitions in themselves are less relevant. We want to find the best way to express a view on trends. Traders have some freedom to decide where and how to implement,” says van den Broek.
Staying diversified
Diversification is crucial to retain room for manoeuvre especially amid crisis situations. “When there are larger market moves, we do not have to trade but we are willing to trade. When Russia invaded Ukraine, some parts of our portfolio, such as electricity, metals and oil, did very well, while currencies in Eastern Europe lost money. At the portfolio level we did well and were able to keep the Eastern European currencies and let them recover,” explains de Boer.
Portfolio diversification also allows the portfolio to maintain a reasonable level of volatility. For instance, Transtrend did not dramatically downsize the book in March 2023, and was able to swiftly recover losses. The resilience came from the functioning of the team. “Team collaboration – not second guessing but trusting one another to do what is needed – helped April 2023 profits to outweigh March 2023 losses,” says de Boer.
Execution and liquidity provision
“The shift from floor to screen trading was a big change. More and more money is being pushed around in inflexible ways, using many effectively similar execution strategies,” says de Boer. Execution efficiency is an ongoing research project and Transtrend believe that they can earn a liquidity premium for liquidity provision in execution in a way that sounds quite paradoxical and counter-intuitive for a trend follower. Transtrend will often be selling a fast-rising market such as cocoa in early 2024 to maintain its risk weighting and portfolio diversification. Similarly, it could be covering part of a short in a rapidly declining market for the same reason. The majority of trading volumes are devoted to risk management rebalancing rather than entering a new trade or fully exiting a trade. “We sometimes need to explain to exchanges that when we sell at a higher price and prices subsequently come down, they should not adjust those prices because it rewards those responsible for the market disturbance at the expense of those that are active and helpful in correcting the market when prices are disrupted. Part of our trading style is to receive a liquidity premium when others are forced to pay it,” says de Boer.
Transtrend trades 24 hours a day on exchanges globally. The highest frequency data is used to inform execution analysis, although Transtrend is not in the speed race of HFT. “The big advantage is that we have time on our side. We can be patient in waiting to execute,” says de Boer.
Exchanges and engagement
Over the years, Transtrend has engaged with multiple exchanges over their practices for execution, settlements, orders, cancellations, product characteristics and so on: “We have discovered that some exchanges are more reliable than others,” reveals de Boer.
After the London Metal Exchange (LME) cancelled some nickel trades in 2022 Transtrend ceased trading and has only just resumed after two years of private dialogue and public comment. Transtrend’s thought leadership papers argued that cancelling all trades over an entire session was bad for both financial and physical participants. They further argued that opening the market implied that LME had trust in the prices. They suggested that rather than retrospectively cancelling trades, the LME could have chosen other options within its rulebook, such as announcing that the settlement price would be capped at the previous day’s level.
