Transtrend aims to contribute to well-functioning, well-organized and reliable markets. We consider this a great social responsibility, given the importance of well-functioning markets for our society. And we believe this will also lead to attractive and sustainable results for our clients.
At Transtrend, responsible investing means being an active investor, conscious of the role we have in the marketplace, aware of the impact we can have on markets, and aware of the fundamental role that markets have in our society.
Markets serve two main functions: they facilitate price discovery and offer an exchange for risk.
For investors active on financial and commodity markets, the only responsible source of return is risk premium. Transtrend – and its 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.
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 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 a loss from time to time, who do not sell during sell-offs but 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 just 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.
For markets to function, there should be a continuous interaction between prices, supply and demand. For instance, when shortage looms, prices should rise in time to give producers incentive to raise their production and/or to give consumers an incentive to find alternatives. Without such interaction, markets would swing wildly from over-supply to over-demand. This mechanism will be intuitively clear in commodity markets. But, indirectly, the same principle holds true for financial markets. For instance, the value of a company should rise if the goods or services that it produces are in demand. And if not, it should not.
Markets are not a train that one can hop on and hop off without impacting its timetable.
Markets do not rise to make investors happy. Prices should rise if future supply would not keep up with future demand without such rise. Speculative buying by investors has the same immediate market impact. This supports the process of price discovery 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 non-synchronicity in the willingness to trade. Transtrend aims to promote a healthy balance between supply and demand.
The following document contains the first chapter from our responsible investment policy. It deals with our role as an investor. What position do we take, or try to take, in society.
Transtrend is a signatory to the Principles for Responsible Investment – a framework designed to contribute to a more sustainable global financial system.