Research

Trade finance fund managers outperformed major hedge fund strategies amidst COVID-19 pandemic

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 41 active funds focusing on trade finance strategies and is the first benchmark index designed to help institutional investors track the performance of the sector. The index returned 6.70% throughout 2018, despite the escalating trade tension between the US and China. Trade finance funds returned 5.34% in 2019 and were up 0.82% over the first five months of 2020.

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 the 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 above, trade finance hedge funds have managed to return 6.82% per annum, outperforming both their fixed income counterparts and the global investment grade bonds which returned 5.43% and 2.58% per annum respectively since the end of 2009. The high-yield bond markets generated a marginally lower annualised return of 6.58% over the same period, weighed by the recent rout in the sector following the escalation of the COVID-19 outbreak.

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

9.04%

5.54%

15.19%

12.98%

2011

8.56%

5.64%

4.38%

4.36%

2012

7.62%

4.32%

15.58%

11.81%

2013

6.51%

(2.60%)

7.42%

5.94%

2014

7.25%

0.59%

2.50%

4.49%

2015

6.28%

(3.15%)

(4.64%)

1.09%

2016

6.61%

2.09%

17.49%

6.75%

2017

6.40%

7.39%

7.48%

6.60%

2018

6.70%

(1.20%)

(2.26%)

0.21%

2019

5.34%

6.84%

14.45%

7.99%

May 2020 year-to-date

0.82%

2.08%

(5.73%)

(4.48%)

2 year annualised return

5.00%

4.33%

2.83%

1.34%

2 year annualised volatility

0.74%

3.92%

11.25%

7.34%

2 year Sharpe ratio (RFR = 2%)

4.05

0.59

0.07

(0.09)

3 year annualised return

5.55%

3.46%

2.65%

2.11%

3 year annualised volatility

0.65%

3.81%

9.20%

6.00%

3 year Sharpe ratio (RFR = 2%)

5.43

0.38

0.07

0.02

5 year annualised return

5.74%

3.28%

4.06%

3.00%

5 year annualised volatility

0.61%

4.49%

8.26%

4.90%

5 year Sharpe ratio (RFR = 2%)

6.12

0.29

0.25

0.20

5 year maximum drawdown

(0.31%)

(7.07%)

(15.84%)

(9.24%)

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 0.82% as of May 2020 year-to-date, trailing behind the global government bond market which benefited from the accommodative central bank policies aimed to ease the economic impact of the pandemic. The Eurekahedge Fixed Income Hedge Fund Index and the high-yield bond market were down 4.48% and 5.73% respectively over the first five months of 2020.
  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 6.12.
  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 0.31% over the last five-year period ending May 2020.

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

Table 2: Correlation matrix
Correlation matrix - trade finance hedge fund

Source: Eurekahedge

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 May 2020, trade finance hedge funds have yielded 0.55% and 0.53% 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 2012. The recent coronavirus outbreak has weighed on the performance of some trade finance funds focusing on emerging markets, resulting in the first negative 10th percentile return among the constituents of the Eurekahedge Trade Finance Hedge Fund Index in recent years.

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

As of May 2020, the trade finance hedge fund industry assets stood at US$9.2 billion, collectively managed by 37 funds. These figures are slightly lower than the end-2019 figure of US$9.5 billion and 39 funds, reflecting the challenges and difficulties faced by trade finance fund managers following the coronavirus outbreak despite the sector’s positive performance.

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

The consistent and uncorrelated returns offered by trade finance strategies are likely going to remain as the driver of growth for the niche sector over the coming years. However, several key challenges remain for investors and fund managers looking to invest in trade finance, including the difficulty of performing due diligence, lack of standardisation, and high operational costs.

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