For investors active on financial and commodity markets, the only responsible source of return is risk premium. We — and our clients — must therefore be prepared to take risks. Specifically market price risk, which results from potential price changes due to shifts in the flows of supply and demand. And by taking on risk, we are prepared to lose money. This is an important role of investors. Investors do not receive risk premium for free. They receive risk premium for being prepared to lose money in scenarios in which other market participants are unwilling or unable to lose money.

This preparedness to lose is closely linked to another important role of active investors: to offer liquidity. Investors who are prepared to lose do not sell during sell-offs, but instead are willing and able to buy when markets are being pushed below their reasonable value. So, part of the risk premium we are after is effectively liquidity premium. Market participants who are prepared to take an occasional loss, who do not sell during sell-offs but instead are willing to buy, are of essential importance to the stability of the economy. They are a calming factor in times of adversity.

Being prepared to lose money and to offer liquidity is not prompted by charitable considerations, but by the expectation that losses will be more than compensated for via positions in other markets and/or at other points in time.

There is no market without market participants. And no market participant — surely not a professional investor — has a ‘right’ to buy or sell against a fair price. Instead, it is our responsibility to contribute to the formation of fair prices. Every price move is the aggregated market impact of all participants active on that market. And that market itself is only a part of a larger market — producers and consumers also form part of it; their business decisions are influenced by what they see happening in the market. This is especially the case with futures markets, where price discovery is even more important than in spot markets.

Markets do not rise to make investors happy. Prices should rise if future supply otherwise would not keep up with future demand. The buying by informed investors plays an important role in this process. But just as aggressive buying by other market participants has the exact same market impact. This supports the price discovery process only if this buying matches the developments in the larger underlying market.

A stable market requires a balance of supply and demand. In the long run, the economy generally manages to find this balance. But in the short term, markets can become badly unbalanced. Buyers and sellers do not always come to the market at the same time. Sometimes there are rational grounds for this. But often, irrational psychological or technical factors are at play. With their order flow, investors can amplify the imbalance. But active investors can also compensate for this asynchronicity in the willingness to trade. Transtrend aims to promote a healthy balance between supply and demand.

When making investment decisions, Transtrend does not consider any adverse impact that its investment decisions may have on sustainability factors as defined in the Sustainable Finance Disclosure Regulation. For more information, please read our full SFDR disclosure.

Transtrend is a member of the Alternative Investment Management Association (AIMA), the global representative of the alternative investment industry. AIMA focuses on shaping the global financial markets reform debate, enhancing the wider understanding of the alternative investment industry, and supporting the industry by providing education and developing guidelines on best practice.