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Digital Subscriptions > The Hedge Fund Journal > Issue 121 - March | April 2017 > Transtrend

Transtrend

25 Years of Active Trend Following: Differentiated, Dutch and Innovative

Transtrend started life in 1989 as a research project in a Rotterdam-based commodity trading house, but swiftly joined the ranks of the world’s largest CTAs. It is one of the 20 CTAs making up the BarclayHedge BTOP50 index and is a constituent of two Société Générale Prime Services indices: the SG CTA index and the SG Trend Index. Assets of around $5 billion make Transtrend the most sizeable hedge fund manager in the Netherlands, and the firm belongs to The Hedge Fund Journal’s “Europe 50” ranking of the top 50 hedge funds in Europe (including the UK). “But Transtrend’s aim has always been to be among the best and not the biggest,” says Head of R&D and Managing Director, Harold de Boer. Transtrend is distinguished from other CTAs by qualities including its performance; investment universe; ways of defining markets and trends; in-house research process and preferred statistical and risk management techniques.

Dangers of passive investing

De Boer is an advocate of active management and his iconoclastic perspectives could shift the active versus passive debate into new directions. It is common to argue that active management adds value for less liquid and less efficient asset classes (such as commodities, small cap equities, credit or emerging markets) whereas passive approaches win out for larger and more liquid asset classes (such as large cap equities). De Boer thinks that the entire index mentality is fundamentally flawed however and calls for what might sound like a new paradigm – but is in fact a return to the original way of investing. “The average fund in the 1920s was genuinely active, unconstrained and was in effect what nowadays is called a hedge fund,” he points out.

De Boer believes that allocators need to get back to first principles in defining what investing is. “Active management should involve conscious decisions about asset allocation, security selection, risk and reward. This is how it began centuries ago, followed by organised exchanges, with indices coming many decades later, and passive investing in indices only a relatively recent phenomenon,” he reflects.

”Markets are not a train you can just jump on and off without impacting the timetable.”

— HAROLD DE BOER

De Boer views markets as “a cooperation of traders and other participants that only functions with active investors. Index tracking and index beating undermine the whole concept. Markets are not a train you can just jump on and off without impacting the timetable. Every market participant has market impact.” The benchmark straitjacket is most obviously at variance with investors’ objectives because it rejects absolute returns in favour of relative returns, and thereby asks investors to tolerate any losses just because they are index losses. De Boer thinks it is axiomatic that “trading for absolute return after costs should be the only criterion of investing.”

Though De Boer views index tracking as a misguided objective, he contends that passive investing does not deserve its name. The paradox of index tracking that indices do, in fact, imply taking active bets – and bets that investors who started with a clean slate would not necessarily choose. It is well understood that cap-weighted bond and credit indices give the highest weightings to the most indebted countries, industries and companies and De Boer points out that equity indices share similar biases, stating “the composition of indices changes. And even if it doesn’t, the activities of the individual constituents of an index change. For instance, in 2000, owning a broad equity index included a huge weighting in highly valued technology, media and telecoms (TMT) sectors. In 2007, owning the index implied holding a big bucket of banks that were effectively highly leveraged and had roughly quadrupled their leverage in a few years. Therefore, ‘tracking error’ relative to an index is utterly inappropriate as a measure of genuine active investing risk.”

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