London (HedgeNordic) – HedgeNordic interviewed Transtrend’s Head of Portfolio Management, Toni Budimir, for the first time since he assumed the role in January 2020. Budimir works closely with Harold de Boer, Head of R&D, and the rest of the team. They find commodities are an important source of returns and diversification. We also explored Transtrend’s views on commodity market ecosystems, which underly their often differentiating view on a range of topics, including responsible investing.
Budimir studied Applied Mathematics at Delft University of Technology and started as a research analyst in Transtrend’s portfolio management team in 2014. “Many in our team have studied Mathematics, Physics or Engineering, and share a love of applying Mathematics to practical financial problems. Researchers need more than strong quantitative skills – they also need to show potential for creativity and innovation,” says Budimir, who just marked his tenth year at the firm.
“Researchers need more than strong quantitative skills – they also need to show potential for creativity and innovation.”
Toni Budimir, Head of Portfolio Management at Transtrend
The 78 staff have on average been with Transtrend for close to 12 years and all are either native Dutch speakers or have learnt Dutch. Transtrend trades globally but has only one office, in Rotterdam, near the central train station. Staff spends at least 3 or 4 days per week in the office, which is almost open plan, so that researchers can share and compare ideas with IT, electronic trading and operational groups.
“In portfolio management we have our own desks, but also sit regularly on the trading desk to discuss how things are going,” says Budimir.
Transtrend was born out of an oilseeds and grains trading company, and thus its trading of markets such as oats and palm oil predated the June 1992 launch of the Diversified Trend Program (DTP), its one and only strategy. While Transtrend also trades a broad range of equity, interest rate and currency markets, commodity markets are their home ground.
Commodity Exposure
The commodity exposure within DTP is dynamic rather than fixed as the strategy aims to capture trends wherever they occur. “In 2021, commodities and especially energy made a big contribution. In 2022, there was more financial markets exposure. In 2023, returns would have been negative without the agricultural markets and so far in 2024 commodities, especially cocoa, have played a big role in the positive return year-to-date,” says Budimir.
“In 2023, returns would have been negative without the agricultural markets and so far in 2024 commodities, especially cocoa, have played a big role in the positive return year-to-date.”
Toni Budimir, Head of Portfolio Management at Transtrend
Exposure to commodities has on average been between 20-25% of risk and has been close to 40% as well in periods of strong trends in commodity markets. Including all synthetic markets, where Transtrend combines two outright markets to effectively create a new market, can lift the average allocation another 5-10%, again depending on prevailing trends.
“And of course, developments in commodity markets at times also drive related companies like mining stocks and commodity-rich currencies like the Norwegian kroner. Not to mention what has been happening to interest rates because of the commodity-driven rise in inflation. While it’s clear that commodities are very important in our program, we don’t treat them as a separate asset class; they are actually a very diverse group of markets with very different dynamics, precisely the reason why we like them”, Budimir carefully explains.
Any perception that CTAs, like Transtrend, are accentuating commodity price trends is wrong, according to Budimir. “We tend to size positions inversely to recent volatility and this leads to regular selling in a strong uptrend and buying in a reaction.” During the strong rally for cocoa in the last 12 months, Transtrend has actually sold some 90% of their position. “We are natural sellers rather than buyers in a long-lasting uptrend,” explains Budimir.
“Alternative” and “Traditional” Markets
Transtrend trades most markets on exchange (through futures), some currencies over the counter, and single stocks through total return swaps. Within futures, Transtrend trades a variety of exchange traded commodity futures, including energy, metal and agricultural markets.
A number of these markets are sometimes described as “alternative markets”. Transtrend finds the common distinction between “alternative” and “traditional” markets artificial and unhelpful. Many criteria can be used to define what is alternative and what is traditional, but none of the criteria are consistent across all markets defined as alternative. There are always some traditional and alternative markets that do, and do not, meet the criteria.
“In any case, it is not possible to predict what trends will appear and when. After the Russian invasion into Ukraine, there were strong trends in grains, often defined as “traditional”, as well as in electricity markets, often defined as “alternative”. So alternative markets can anyway become correlated with traditional markets from time to time,” observes Budimir.
Inclusion of Markets
Transtrend’s general approach in terms of what markets to trade is to prefer inclusion rather than exclusion of markets. “The energy transition adds a lot of risk to the parties involved and not all are willing or able to bear these risks. Futures markets are designed to transfer these risks and active traders like CTAs are well equipped to take on that risk. At the same time, we do not want to exaggerate our role. Futures traders have a role to play but in the end it depends on consumers, producers and governments’ decisions on how the energy transition will unfold,” says Budimir.
“The energy transition adds a lot of risk to the parties involved and not all are willing or able to bear these risks. Futures markets are designed to transfer these risks and active traders like CTAs are well equipped to take on that risk.”
Toni Budimir, Head of Portfolio Management at Transtrend
Carbon trading also plays an important role in the energy transition. Transtrend has been trading carbon futures markets since 2006, profiting for example from the tripling of EUA carbon credit prices in 2021.
Engagement
One important element of responsible investing is engagement. Given Transtrend’s role in markets and the instruments they trade, their engagement is not as a shareholder aimed at the management of listed companies but instead primarily focused on the well- functioning of markets, for example on observed trading activity that undermines the well-functioning of markets.
As an example, Transtrend ceased trading with the LME after the exchange cancelled $12 billion of nickel trades on 8 March 2022, when nickel prices tripled, but has recently resumed trading with the LME.
“This cancellation of prices impacted our trust in that exchange. We decided against litigation that some hedge funds have pursued and instead have actively engaged with the LME for the required changes in order to regain the trust to trade these markets. We joined their user committee and continue to engage with them to discuss our understanding of well-functioning markets and the role of exchanges” says Budimir.
Price Discovery in Futures Markets
As part of managing their Diversified Trend Program, Transtrend strives to contribute to well-functioning, stable markets. For that reason, they do not use price-insensitive orders such as “market-on-open” or “trade-at-settlement” orders; active participation in markets is one of the key components of their underlying investment strategy.
The presence of price-sensitive buyers and sellers is required for price discovery, an important aspect of futures markets as they provide important signals in the ecosystem of commodity markets.
“If you are a producer or consumer of materials, your behaviour may change depending on the futures price. High prices for example may encourage more mining of metals or planting of crops. We have recently seen high cocoa prices encouraging farmers in South America to switch their crops to cocoa.”
“Well-functioning futures markets inform real world decisions through these sorts of feedback loops and help to balance physical supply and demand.”
Toni Budimir, Head of Portfolio Management at Transtrend
In 2021 and 2022, the tenfold increase in natural gas prices in Europe impacted the physical natural gas markets, both from the perspective of producers and consumers.
“Well-functioning futures markets inform real world decisions through these sorts of feedback loops and help to balance physical supply and demand,” points out Budimir.
Capturing Future Trends
Looking forward, real-world challenges like the return of inflation, more extreme weather, the energy transition and geopolitical developments are likely drivers of change in the world around us. Change that is often characterized by trends in markets transcending asset classes.
Given their broad market universe across asset classes and with commodity markets being part of their DNA, Transtrend looks well positioned to be able to pick up and benefit from these trends.
