Key Takeaways
- • Eurekahedge's Trade Finance Hedge Fund Index, the first benchmark for the sector launched in 2018, returned 0.82% in the first five months of 2020, trailing the global government bond market but ahead of the fixed income hedge fund index (-4.48%) and US high-yield bonds (-5.73%) over the same period.
- • Over the five years to May 2020, the index posted an annualised return of 5.74%, annualised volatility of 0.61%, and a Sharpe ratio of 6.12, with a maximum drawdown of just 0.31%.
- • Trade finance hedge fund assets stood at US$9.2 billion across 37 funds as of May 2020, down from US$9.5 billion and 39 funds at end-2019.
- • The index's low correlation to fixed income benchmarks positions trade finance strategies as a diversifier for institutional portfolios, though due diligence difficulty, lack of standardisation and high operational costs remain barriers.
Summary
Trade finance hedge funds have attracted growing institutional interest, driven by demand for alternative strategies offering low volatility, consistent returns and low correlation to broader markets, according to Eurekahedge. The sector's growth accelerated after the 2008 global financial crisis, when banks reduced trade finance exposure to meet Basel III capital requirements. To address the absence of a standard benchmark, Eurekahedge launched the industry's first trade finance hedge fund index in 2018.
The Eurekahedge Trade Finance Hedge Fund Index is equal-weighted and comprises 41 active funds. It returned 6.70% in 2018 and 5.34% in 2019. Over the first five months of 2020, it returned 0.82%, lagging the Bloomberg Barclays Global-Aggregate TR Index, which benefited from accommodative central bank policy during the COVID-19 pandemic, but outperforming the Eurekahedge Fixed Income Hedge Fund Index (-4.48%) and the Merrill Lynch US High Yield Master II Index (-5.73%).
Since the end of 2009, trade finance hedge funds have returned 6.82% per annum, compared with 5.43% for fixed income hedge funds, 2.58% for global investment grade bonds and 6.58% for high-yield bonds, the latter weighed by the COVID-19 sell-off. Over the five years to May 2020, the index recorded a Sharpe ratio of 6.12 against 0.29 for the global aggregate index, and its maximum drawdown of 0.31% compared with 7.07% and 15.84% for global aggregate and US high-yield benchmarks respectively. Eurekahedge reports 0.55% and 0.53% annual alpha versus investment grade and high-yield bond indices over the long term, on a risk-free rate of 0%.
Emerging-market-focused trade finance funds weighed on performance during the pandemic, producing the first negative 10th percentile return among index constituents in recent years. As of May 2020, sector assets were US$9.2 billion across 37 funds, modestly lower than US$9.5 billion across 39 funds at end-2019.
Eurekahedge expects the uncorrelated return profile to continue driving growth, while noting persistent challenges including difficult due diligence, lack of standardisation and high operational costs.
The Eurekahedge Trade Finance Hedge Fund Index is equal-weighted and comprises 41 active funds. It returned 6.70% in 2018 and 5.34% in 2019. Over the first five months of 2020, it returned 0.82%, lagging the Bloomberg Barclays Global-Aggregate TR Index, which benefited from accommodative central bank policy during the COVID-19 pandemic, but outperforming the Eurekahedge Fixed Income Hedge Fund Index (-4.48%) and the Merrill Lynch US High Yield Master II Index (-5.73%).
Since the end of 2009, trade finance hedge funds have returned 6.82% per annum, compared with 5.43% for fixed income hedge funds, 2.58% for global investment grade bonds and 6.58% for high-yield bonds, the latter weighed by the COVID-19 sell-off. Over the five years to May 2020, the index recorded a Sharpe ratio of 6.12 against 0.29 for the global aggregate index, and its maximum drawdown of 0.31% compared with 7.07% and 15.84% for global aggregate and US high-yield benchmarks respectively. Eurekahedge reports 0.55% and 0.53% annual alpha versus investment grade and high-yield bond indices over the long term, on a risk-free rate of 0%.
Emerging-market-focused trade finance funds weighed on performance during the pandemic, producing the first negative 10th percentile return among index constituents in recent years. As of May 2020, sector assets were US$9.2 billion across 37 funds, modestly lower than US$9.5 billion across 39 funds at end-2019.
Eurekahedge expects the uncorrelated return profile to continue driving growth, while noting persistent challenges including difficult due diligence, lack of standardisation and high operational costs.
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