Our non-credit approach to enabling physical commodity import/export transactions, which is unique in the trade finance hedge fund world, swaps pure credit risk faced by investors in other trade finance funds for real-world insurable physical risks. The fund does this by simultaneously entering in to a purchase contract for the commodity from 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 price risk per se, only if the end buyer were to default by not paying the full value of the cargo upon delivery could the Fund be potentially exposed to the commodity asset price falling. This statistically low risk event is mitigated by the risk management methodology employed by the Fund, which looks very similar to the approach used by modern day financial market clearing houses. The Fund requires prepayment fees from end buyers to ensure the Fund has a price risk buffer that in the very unlikely event the end buyer does not pay the balance due payable for the commodity upon delivery, the Fund has some price buffer and cash available to cover potential costs of selling the commodity to another buyer and recovering the original investment made by the Fund. It is quite possible that the end buyer defaults but prices of the commodity has increased, in which case there is the potential for the Fund to make a higher profit on the transaction.
Given the current concern in the media about the size of the corporate debt market, negative interest rates around the world, the US dollar rates e.g. USD 3 month LIBOR rate now clearly below 2 percent, and the long term 2 year versus 10 year US dollars interest rates inverting, the Fund is finding increased interest in the trade finance asset class and its unique strategy which also offers diversification away from pure private credit risk. Family offices traditionally looking for strong RAROC’s with capital preservation a core theme have been steady investors in this asset class, but now pension schemes, corporate treasury, insurance companies looking for yield and diversification are seen entering this investment space in a big way. Many are approaching the fund given the fixed income type returns and implied risk, plus the short tenors in the portfolio, and no lock in period. Due to investor demand we launched the EURO denominated version of our strategy in February 2020, the EURO TRADE FLOW FUND SP
It is well known that the trade finance asset class offers strong portfolio diversification away from financial markets and it is offering investors strong yields. This strategy which focuses on bulk physical raw commodities like cocoa, coffee, beans, rice, oil, diesel, other energy products and metal combined with a non-credit non-lending approach, is also offering investors diversification away from pure credit strategies and is proving to offer diversification away from weakening central bank interest rates.
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TradeFlow Capital Management
Investment Advisor to the USD & EURO TRADE FLOW FUNDS
Trade Support Hotline:
+65 3138 1734