Research

Trade finance hedge funds maintained their winning edge throughout the trade war

Trade finance hedge funds have gained traction over recent years, driven by investor demand for alternative asset classes with low volatility and consistent return, as well as low correlation against the broader financial market. The sector began its rapid growth following the global financial crisis in 2008, when banks started reducing their trade finance exposure to meet Basel III capital requirements. To address the lack of a standard benchmark for this niche hedge fund strategy, Eurekahedge launched the industry’s first trade finance hedge fund index in 2018, providing institutional investors with a benchmark index representing the performance of trade finance hedge fund managers.
 
The Eurekahedge Trade Finance Hedge Fund Index is an equal-weighted index comprising 15 active hedge funds focusing on trade finance, and is the first benchmark index designed to help institutional investors track the performance of trade finance hedge funds. The index returned 4.73% throughout 2018, in spite of the escalating trade tension between the US and China, which had weighed on the performance of the global hedge fund industry during the year. Over the first half of 2019, trade finance hedge fund managers have gained 2.78%.

Figure 1 below compares the performance of the Eurekahedge Trade Finance Hedge Fund Index against fixed income hedge fund managers, as well as the global investment grade bond and US high-yield bond markets represented by the Bloomberg Barclays Global-Aggregate TR Index and the Merrill Lynch US High Yield Master II Index respectively.

Figure 1: Performance of trade finance hedge funds against comparable benchmarks since the end of 2009
Performance of trade finance hedge funds against comparable benchmarks since the end of 2009

As observed in Figure 1, trade finance hedge funds have managed to return 6.47% per annum, outperforming both their fixed income counterparts and the global investment grade bonds which returned 6.10% and 2.48% per annum respectively since the end of 2009. Even though the high-yield bond markets generated a marginally superior annualised return of 7.48% during the period, this asset class inherently carries higher risk and volatility compared to trade finance.

Table 1: Performance in numbers – Eurekahedge Trade Finance Hedge Fund Index vs. comparable benchmarks

 

Eurekahedge Trade Finance Hedge Fund Index

Bloomberg Barclays Global-Aggregate TR Index

Merrill Lynch US High Yield Master II Index

Eurekahedge Fixed Income Hedge Fund Index

2010

8.43%

5.54%

15.19%

12.94%

2011

6.95%

5.64%

4.38%

4.37%

2012

6.91%

4.32%

15.58%

11.66%

2013

6.33%

(2.60%)

7.42%

5.89%

2014

6.52%

0.59%

2.50%

4.39%

2015

5.80%

(3.15%)

(4.64%)

1.03%

2016

6.64%

2.09%

17.49%

6.67%

2017

6.39%

7.39%

7.48%

6.50%

2018

4.73%

(1.20%)

(2.26%)

0.04%

June 2019 year-to-date

2.78%

5.57%

10.16%

5.01%

2 year annualised return

5.49%

3.58%

5.02%

3.89%

2 year annualised volatility

0.71%

3.82%

4.86%

1.98%

2 year Sharpe ratio (RFR = 2%)

4.90

0.41

0.62

0.96

3 year annualised return

5.80%

1.62%

7.54%

5.23%

3 year annualised volatility

0.70%

4.51%

4.46%

1.86%

3 year Sharpe ratio (RFR = 2%)

5.42

(0.08)

1.24

1.74

5 year annualised return

5.94%

1.20%

4.70%

3.86%

5 year annualised volatility

0.70%

4.59%

5.59%

2.10%

5 year Sharpe ratio (RFR = 2%)

5.60

(0.17)

0.48

0.88

5 year maximum drawdown

(0.02%)

(7.66%)

(21.76%)

(12.76%)

Source: Eurekahedge

Table 1 provides the detailed risk return statistics of the four indices shown in the figure above. Key takeaways include:

  1. The Eurekahedge Trade Finance Hedge Fund Index has returned 2.78% as of June 2019 year-to-date, trailing behind fixed income hedge fund managers who benefited from falling bond yields since the beginning of the year. Looking at 2018 returns, trade finance hedge fund managers were up 4.73% for the year, vastly outperforming their benchmarks, as well as the global hedge fund industry in general.
  2. By virtue of the low volatilities associated with the trade finance strategies, hedge fund managers comprising the Eurekahedge Trade Finance Hedge Fund Index have generated exceptional Sharpe ratios over the recent years, outperforming their benchmarks by a significant margin. Over the last five years, trade finance hedge fund managers generated a Sharpe ratio of 5.60.
  3. Apart from the exceptional risk-adjusted returns, trade finance hedge fund managers have also managed to provide incredible downside protection. The Eurekahedge Trade Finance Hedge Fund Index has posted a maximum drawdown of 0.02% over the last five years. In comparison, the Bloomberg Barclays Global-Aggregate TR Index suffered a maximum drawdown of 7.66% over the same period, while the other two benchmarks representing high-yield bonds and fixed income hedge funds suffered double-digit maximum drawdowns.

Table 2 provides the correlation values between the performances of trade finance hedge fund managers against their benchmarks. As seen in the table, the Eurekahedge Trade Finance Hedge Fund Index is very weakly correlated to the other indices.

Table 2: Correlation matrix
Trade Finance Hedge Fund Strategy Profile Correlation Matrix

Figure 2 provides the 12-months rolling alpha of the Eurekahedge Trade Finance Hedge Fund Index against both the Bloomberg Barclays Global-Aggregate TR Index, the Merrill Lynch US High Yield Master II Index, as well as the Eurekahedge Fixed Income Hedge Fund Index, assuming a risk-free rate of 0%. As seen in the figure, trade finance hedge fund managers were capable of generating positive alpha against the aforementioned benchmarks. Over the long-term period from the end of 2009 until June 2019, trade finance hedge funds have yielded 0.52% and 0.50% alpha against the global investment grade bond index and the high-yield bond index respectively.

Figure 2: 12-months rolling Alpha of trade finance hedge funds vs comparable benchmarks (RFR = 0%)
12-months rolling Alpha of trade finance hedge funds vs comparable benchmarks (RFR = 0%)

Figure 3 provides the performance distribution of all trade finance hedge funds in the Eurekahedge database, showing the median return, 10th and 90th percentile returns, as well as the top and bottom quartile returns on a yearly basis since 2011. Out of the nine years shown in the figure, 2012 is the only year during which more than 10% of the funds were posting losses.

Figure 3: Performance distribution of trade finance hedge funds
Performance distribution of trade finance hedge funds

Despite the escalation of the US-China trade dispute last year, most of the trade finance hedge fund managers were able to generate positive return in 2018. Going into 2019, these fund managers have recorded a median return of 3.05% year-to-date.

Figure 4: Trade finance hedge fund industry growth
Trade finance hedge fund industry growth

Going forward, the consistent performance and low volatility of trade finance hedge funds would likely attract more capital into the sector as investors look for additional sources of return and diversification amidst the low interest rate environment which has persisted since the global financial crisis. However, there are several key challenges investors and fund managers looking into trade finance may face. Firstly, the difficulty of performing due diligence on the asset class due to the lack of transparency and standardisation has resulted in high operational costs for fund managers investing into trade finance, which may in turn translate to higher fees charged by these managers. The live trade finance hedge funds tracked by Eurekahedge as of June 2019 charge 1.56% management fee and 16.63% performance fee on average, both of which are relatively high compared to the fees charged by recently launched hedge funds across all strategies.

The full article inclusive of all charts and tables is available in The Eurekahedge Report accessible to paying subscribers only.

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