Tom James is CIO & CEO and a co-founder of the CEMP - NR Capital Trade Flow Fund SP (the Fund), the innovative digitised trade finance solution for bulk physical commodity transactions being shipped or stored around the world. He is widely recognised as a leading practitioner in the global natural resources market with over 30 years of commercial exposure gained through broad ranging senior regulated roles in financial institutions (including Bank of Tokyo Mitsubishi UFJ, Credit Agricole and Credit Lyonnais) and various trading firms including BHP Billiton. These roles have enabled him to gain a holistic industry perspective, covering a full range of functional areas including trade finance, project finance, investment banking, supply chain/operations, derivatives, physical markets, and fund management. During his career he has operated in many countries in Africa, Europe, Middle East, and Asia Pacific. He has authored/edited over nine books in the energy & commodity trading and risk management field and served as Chair Professor and Adjunct Professor at various universities around the world including Korea, Singapore, India, U.K. and is a former member of the United Nations FAO Commodity Risk Management Advisory Group, and former Senior Energy Advisor to United States Department of Defense (TFBSO).
John Collis is a co-founder of the Fund and holds the position of Chief Legal Officer (CLO) and Head of Compliance. As well overseeing the development of the Fund’s critical legal infrastructure and working with leading Counsel on its enforceability, John has overseen the classification of the specialist intellectual property developed and acquired by TradeFlow and its licensing; and has worked with insurance underwriters and external lawyers on the legal aspects of the Fund’s risk matrix and specifically with reference to bulk commodity transactions and their exposure to multiple jurisdictions. John is a commercial lawyer with expertise in regulatory, compliance, structuring, and transactional matters. John operated his own law firm from 2003, specialising in international commercial work. John has written and lectured about the rule of law, Eurasia Economic Union, CSTO, and International Commercial Enforcement. Before becoming a lawyer, John worked for Ernst & Young, he was educated at Oxford University and is chairman of Hertford College RFC.
Tradeflow Capital is a member of the Alternative Investment Management Association (AIMA) and a corporate member of the Singapore FinTech Association (SFA).
- Please share with our readers a bit of background to the NR Capital Trade Flow Fund, including the key personnel of the team
In 2016 the founding team with a diversified background spanning commodity trading, shipping, technology and law came together to research into and develop a solution for the growing trade finance gap faced by global SME firms operating as producers/traders/end users in the bulk commodity import/export space. Their research found that the growing trade finance gap for SME firms in this arena was driven by several key factors including changing banking regulations, the burden of increased KYC/AML costs and requirements and the general issue that most SME firms faced was despite having the proven expertise in their management and operations team they did not have a track record of more than three years, or their balance sheet was not big enough, or transaction size per import/export trade was too small for any bank to support. The solution to this ecosystem problem was a simple one, i.e. find a way to enable the transaction for an SME firm without giving credit or finance. The unique solution is the CEMP - NR Capital Trade Flow Fund SP which takes a principal position and direct ownership of the commodities during shipment or during a pre-agreed storage period. The Fund launched in April 2018 after two years of research and development work on the business model, a digitised technology platform to allow the Fund strategy to be scalable and the legal framework master agreements to connect everything together.
- Please walk us through your investment processes, from identifying opportunities to constructing the fund portfolio. What would you consider as your winning edge against other trade finance hedge funds?
The Fund offers investors a globally unique non-credit approach to access the low risk, low default, and diversified returns available from the trade finance asset class. This is the first key difference an investor recognises when comparing us with other Funds. The other key thing is our Digital Platform which enables quick and low cost on-boarding of the counterparts our fund executes transactions with (typically within 3 days with full bank level AML/KYC checks).
As the Fund does not lend money nor give credit it offer a truly asset backed strategy and one which does not compete with banks and traditional trade finance lending sources. As a result, banks work with the Fund and introduce SME clients who they are unable to effectively support; usually due to the fact their transaction sizes are too small and their annual turnover below US$300 million dollars.
Another winning edge is the Fund’s developed bespoke scorecards in cooperation with Lloyds of London underwriters for scoring Counterpart Risk, and a world’s first unique scorecard approach to rate the risk level on each and every individual transaction it invests in.
Another attraction for investors is the liquidity of the fund. It offers 90 day liquidity to investors and as a result the Fund is often referred to as a fixed income alternative and even used as a cash management tool.
- Do share some insights on the fund’s risk management processes to help our readers better understand how the team would cope with the main risks associated with trade finance portfolios and mitigate them.
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.
- What is the current level of interest for trade finance strategies among asset owners? In particular, what kind of investor is the fund geared toward?
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 are now preparing the launch of the EURO denominated version of our strategy, which we plan to have ready for January 2020.
- From an institutional investor’s perspective, how does a trade finance fund fit within their portfolio? How do the characteristics of trade finance fund complement other alternative investment strategies and traditional asset classes?
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.
- Despite the growth exhibited by the trade finance hedge fund industry over the past decade, the sector remains a small niche compared to more established hedge fund strategies. What are the primary challenges faced by asset owners looking to gain exposure toward trade finance hedge funds, and how would the sector evolve in the face of these challenges? Given the relatively small industry size, there are concerns regarding the scalability of trade finance strategies, as well as sensitivity toward withdrawals from large asset owners. Could you share some insights on these topics?
The primary challenge we heard from investors even at the start of the development of our business solution and fund offering back in early 2016 was that investors like Trade Finance, but are unable to get enough of it. We believe that scalability of trade finance strategies has been the biggest challenge for the hedge fund industry. As a result we focused on digitising our whole business and transaction process in order to have the potential to be scalable in to a billion dollar fund handling small SME transactions. We created joint ventures with technology providers and own some of our own technology and had to look at being a FinTech fund manager.
- How do you think the recent trend of increasing protectionism and slowing global economic growth would impact the trade finance hedge fund industry?
The trade finance gap is measured by an Asia development bank to be in the region of US$1.5 trillion dollars. Given the fact there are only 20 or so active trade finance funds tackling this issue, we do not expect that any slowdown in economic growth will adversely impact the trade finance hedge industry.
- With the ongoing Sino-US trade tension weighing on the global hedge fund industry in general, what is your view on how trade finance strategies might perform, should the situation turn for the worse in near future?
For our strategy which supports the import/export of key commodities that form the lifeblood of a modern economy and not finished goods we do not believe it will adversely affect our strategy. Our fund and strategy has probably benefited from the turmoil as European and American banks have been seen to reduce their credit lines and exposure to emerging markets as a result.
- Where do you think the key opportunities lie within the trade finance hedge fund industry for the next few years, and how well is Tradeflow Capital positioned to benefit from the development?
We believe the traditional bank trade finance industry and hedge funds like ours will cooperate more and more, and continue to find synergies and ways to assist each other. We see what we do as complimentary and value-added to areas of trade finance in bulk commodity markets which are increasingly unprofitable and or becoming non-core markets for many Banks. Given our scalable digital trade finance infrastructure we believe our fund and investment management business is in a strong position to support Banks and SME firms around the world. Due to the low interest rate environment in many countries now we are positive for our growth plans in 2020 and investor appetite for yield has promoted us to launch a EURO Trade Flow Fund in January 2020 which will invest purely in Euro denominated commodity transactions.
Professor Tom James
Tradeflow Capital Management
+65 6950 6056 / 6057 / 6058