Our non-credit approach is unique in the trade-finance hedge-fund world. It swaps the pure credit risk faced by investors in other trade-finance funds for real-world insurable physical commodity risks.
How the structure works
The fund simultaneously enters into a purchase contract with the supplier at a fixed price (on behalf of the end-buyer) and an onward sales contract to the end-buyer at a fixed price. The fund is not exposed to commodity price risk in the ordinary course — only if the end-buyer defaults on payment at delivery would the fund be potentially exposed to a price decline on the underlying asset.
This statistically low-risk event is mitigated by a risk methodology that resembles the approach used by modern clearing houses. End-buyers post prepayment fees so the fund holds a price-risk buffer in cash. In the unlikely event of default, that buffer covers the cost of selling on to a replacement buyer and recovering the fund's original investment. If commodity prices have risen at the moment of default, the fund can in fact realise a higher profit on the transaction.
Why the asset class is in demand
Pension schemes, corporate treasuries, family offices, and insurance companies have all increased allocations to trade finance in recent years. Investors are drawn to fixed-income-style returns with implied low risk, short tenors in the portfolio, and no lock-in period. We launched our EUR Trade Flow Fund in February 2020 specifically to meet this demand for euro-denominated exposure.
Diversification benefits
Trade finance offers strong portfolio diversification away from listed financial markets while delivering competitive yields. Our strategy — focused on bulk physical commodities like cocoa, coffee, grains, rice, oil, refined products, and metals, paired with a non-credit non-lending approach — also offers diversification away from pure credit strategies and from the policy direction of central-bank rates.