We show in this paper how strain engineering alters the fundamental characteristic of a martensitic transformation (MT) and gives it a new set of properties including large quasi-linear elastic strain response with nearly vanishing hysteresis and low elastic modulus. The work is motivated and inspired by a recent experimental study on elastic and inelastic (transformation) strain matching in a pre-strained nano-composite with Nb nanowires embedded in a NiTi shape memory alloy matrix. In particular, we demonstrate by computer simulation that dislocations at Nb/NiTi interfaces produced by the pre-straining are responsible for the unprecedented properties. Microstructural evolution captured in the simulations reveals that local stress fields associated with the dislocations regulate the nucleation and growth of martensite, turning the otherwise sharp, strong first-order transition into a continuous, high-order like transition. The simulations predict that the stress-strain hysteresis and modulus of the composite decrease with increasing amount of pre-strain, which agrees well with the experimental measurement. This study suggests a design strategy by introducing non-uniform stress fields for enhanced properties of shape memory alloys.