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Hedge fund Tradeflow Capital made money amid Singapore commodity turmoil
[SINGAPORE] As Singapore was roiled by troubles at two commodity trading firms that may spark billions in bank losses, one hedge fund eked out a small gain. Tradeflow Capital Management returned a half percentage point to investors in April, just as it did the month before, and the month before that.
Hardly dramatic advances, but for the Singapore-based fund, that's entirely the point. Tradeflow has returned about 5.5 per cent over the past 12 months, with steady, bond-like returns derived from financing trade for commodities - among the world's most volatile industries after the coronavirus sent prices for everything from crude to coal tumbling.
Tradeflow has skirted the turmoil by not lending directly to buyers, sellers or trading firms like Hin Leong Trading, the failed oil company that owes HSBC Holdings and other banks almost US$4 billion. Instead, it acts as a middle-man in small trade-finance deals, taking ownership of the commodity and getting it delivered. Even if one party fails, Tradeflow has the goods to sell in the open market.
"Having ownership of the commodity means we're not relying on the balance sheet performance or the credit risk of the end buyer," said Tom James, Tradeflow's co-founder and chief executive officer. "We're relying on the quality of the transaction; the commodity. If it all goes wrong we can sell that commodity quickly to someone else and get our money back."
After some 300 transactions for commodities ranging from diesel and coal to red beans and cashews, the fund hasn't been stuck with a boatload of cargo yet.
While it runs the risk of a plunge in price for the goods during its typical "ownership" period of up to 90 days, it builds buffers of as much as 30 per cent into the contracts to cover any declines. It's been forced to tap those buffers on only three deals - when diesel prices cratered in February, and to cover steep falls for cashews and sesame seeds in China.
By steering clear of defaults and charging a small fee to the buyer for each transaction, Tradeflow has been able to produce steady monthly gains in its first two years, targeting a net annual return of 5 per cent over three-month US Libor, currently 0.42 per cent. The fund returned 6 per cent for 2019.
While the fund has generally left the billion-dollar oil trade financing to the big banks, it has seen fallout from the troubles at Hin Leong and ZenRock Commodities Trading, another Singapore oil trader facing a possible debt restructuring. Tradeflow has been getting more calls after the banks turned skittish.
"People are anticipating that their credit lines from banks at best may stay the same or at worse will be dramatically reduced," said Mr James, who used to arrange trade finance for banks including Credit Lyonnais and has written several books on commodities. "The banks will no doubt add further restrictions and limitations on their own participation. Unfortunately they've been burnt fairly badly."
To take on more clients, Tradeflow plans to grow. The US$30 million fund sees potential to reach US$100 million in a few months and eventually top US$1 billion, co-founder John Collis said.
Tradeflow's typical transaction size is up to US$15 million, yet it sees a funding gap of US$1.5 trillion for small firms in the sector.
There's also scope to work with banks to do bigger deals, using Tradeflow's digital platform that replaces hundreds of pages of printed shipping documents in some cases, Mr James said in an interview.
The hedge fund, backed by family offices and high net worth investors, is also eyeing the credit market. It's in talks with ratings companies to eventually sell a senior note, raising as much as US$100 million, he said.
"The fixed-income market could be where we get the biggest source of funding in the future," Mr James said.