Trade Finance transactions are considered to be of minimal risk due to strong collateral and documented credit operations. The ICC’s Trade Finance loss register reflects the low risk nature of Trade Finance. The average transaction default rate on short term international trade credit is no more than 0.021%, of which 57% is recovered through sale of the underlying asset. The following table shows the risk characteristics of short-term trade finance products. (Table 1; Source: ICC)
Table 1 – Risk Characteristics of Short-term Trade Finance Products
The Trade Finance private-debt-market investment sector has the potential to offer yields ranging well above Libor for short-dated credit exposures of between 30 and 150 days. The secured and short-term nature of trade finance transactions have historically kept default rates to a minimum as seen in Table 1 showing risk characteristics of Trade Finance products. These low default rates have allowed for consistent returns and it is evident that even during the worst of the financial crisis, the asset class did not post a single month of negative returns.
Resilient to Geopolitical Turbulence
Trade Finance is proven to be resilient to geopolitical turbulence. An analysis of 15 active trade finance-focused hedge funds found an average return of 4.73% throughout 2018, despite U.S.-China trade tensions, and a 5.22% gain in the first eight months of 2019, according to research firm Eurekahedge.