Trade finance: an old asset class finding new relevance

Many advisers face a familiar client problem: How to find differentiated sources of income without adding more exposure to traditional return drivers.

Trade finance may be a less familiar investment vehicle to some private wealth clients, but its underlying purpose is straightforward. The asset class provides the credit that allows goods to move from seller to buyer, often across borders, with the goods themselves used as a key part of the collateral package.

Chris McGinley, head of trade finance at Federated Hermes, offers a straightforward definition: “trade finance can best be viewed as a subset of the loan market. It is relatively short-term loans used to finance the physical flow of goods, using those goods as the primary source of collateral within the loan.”

Federated Hermes has been active in trade finance since 2009, with an approach shaped by market cycles, regulatory change and periods of stress. The firm applies a disciplined, originate-to-hold philosophy focused on diversified, collateral-backed transactions tied to essential goods and global supply chains. Trade finance is therefore not a thematic novelty. It is a long-standing credit market attached to a persistent funding shortage.

The real economy problem

The scale of the funding gap is significant, but it is also important to note what the financing supports. McGinley points out that in the West, imported goods are typically associated with discretionary consumption. That framing misses the essential nature of trade flows for much of the developing world.

“In the Western world, we often think of imported goods as luxury items. For the vast majority of the world, they’re the essential goods. It’s the energy that heats their home in the winter, it’s the food that they eat,” he says.

Global trade flows surged past US$35 trillion during 2025, and that trade volume has increased by 6.3 per cent since 2019 and 19.1 per cent compared with the average level in 2015.

McGinley says the role of this part of the market was clear during recent shocks. “So going as far back as the global financial crisis, a lot of the official community, the World Trade Organisation, the IMF, did a lot of studies that showed that the type of trade finance we are doing, the securitised, collateralised, risk mitigation, trade finance, were the types of transactions that kept these essential goods flowing around the world.”

Not lending to the company, but to the trade flow

McGinley highlights what sets trade finance apart from conventional credit.

“What we’re lending to is a specific trade flow or asset conversion cycle, not to a company for general corporate purposes.”

That is the centre of the proposition. A trade finance manager focuses on how goods move, who controls title, where the cash flows sit, what documentation supports the transaction and how repayment occurs once the asset conversion cycle is complete.

Successful transactions depend on clear documentation, strong relationships, compliance and efficient cash flow management. Risk management across credit, currency and geopolitical dimensions is equally critical.

“Both the art and science of analysing one of these transactions is to identify what are the risks inherent in this transaction and how can we mitigate those risks or hedge them to acceptable levels,” McGinley observes. “We look at risk on three different factors: credit risk, structure risk and macro risk.”

Working with banks, not around them

A key point is that managers such as Federated Hermes do not frame trade finance as a way to displace banks. Instead, the portfolio sources deals from global banks and large financial institutions. Approximately 40 per cent of transactions are sourced from European banks, 30 per cent from American banks and the remainder from regional banks, including Japanese and African banks.

“What we are doing is we are partnering with banks in these trade finance transactions,” McGinley says. “For banks, this is an ‘originate-to-hold’, not an ‘originate-to-distribute’ model, it’s a primary business of commercial banks. They’re holding a significant portion of these loans on their balance sheets so that we are investing with them. We don’t see ourselves as a bank disintermediation product. We’re not taking the place of banks. We’re working with banks.”

Borrower profile and risk diversification

The strategy is also deliberately focused on larger borrowers. “Within a corporate trade loan, our typical borrower is doing a US$500m to US$1.5bn loan,” McGinley explains. “These are companies with an average US$1bn-plus EBITDA and leverage ratios of one to maybe three times. So, these are large loans to big companies that have very healthy balance sheets.”

The scale does not remove risk, but it does change the profile of the exposure. It also supports the diversification argument. McGinley says the typical position size is under 1 per cent of the portfolio, with diversification by geography, region, country, sector, subsector and loan type.

For clients seeking different drivers of income, that makes the asset class worthy of a more detailed conversation. Not because it is novel, but because it is old, operationally demanding and structurally different from many of the credit exposures already sitting in client portfolios.