Trade Finance whitepaper

Uncorrelated alpha potential

Trade finance – short-term loans to facilitate physical cross-border transactions – plays a vital role in facilitating global trade flows. It is estimated that 80% of world trade is dependent on some form of financing. This can be attributed to tighter credit conditions for obtaining alternative sources of capital. In this paper, we outline why more investors are turning towards this asset class as a diversifier in their portfolios.

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Federated Hermes was one of the early asset manager adopters of Trade Finance as an asset class, offering it to institutional investors since 2009. Our highly selective investment process has demonstrated resilience and low volatility of returns over time due to a focus on essential goods; greater level of diversification across sectors; long-standing experience in building relationships with partner banks; and in-depth analysis and due diligence.
Trade finance deals are structured to help all parties mitigate the challenges associated with cross-border trade – which can range from foreign currency exchange rates to regulatory compliance and non-payment. The lender can use several risk mitigation techniques to reduce risks to an acceptable level, such as collateral management of the goods, permanent control of the title over the goods and ring-fenced cash flows. The arranger of a trade finance transaction, often a bank, holds a significant part of the deal on its own books to maturity.
The type and characteristics of trade structures can vary depending on the nature of the transaction, countries involved and party creditworthiness. Structures available to investors include: supply chain finance transactions, financial institution trade loans, corporate term loans, sovereign loans and project finance loans.