The $2.5 trillion funding gap advisers should not ignore

The trade finance story is not really about shipping containers, letters of credit or the mechanics of cross-border commerce. Client capital can do something different here: finance the movement of real goods and loosen the grip of the return drivers that dominate most portfolios.

The timing couldn’t be more relevant. Clients are still demanding income, defensive diversification, and a clearer account of what their money is actually financing, and conversations may well begin with the scale of the problem itself.

According to Federated Hermes, the global trade finance gap was estimated at US$2.5 trillion in 2025, a steady increase from US$1.5 trillion in 2015. At the same time, 80 per cent of world trade is dependent on some form of financing. The global economy still relies on credit to move goods from seller to buyer, but the supply of that credit has not kept up with demand.

Trade finance is hardly new. It is one of the oldest forms of credit, dating back to the 13th century, but it has only become readily accessible to private wealth clients in recent years.

At its simplest, trade finance refers to loans that provide short-term financing to support the physical flow of goods. Each facility directly addresses the risks that cross-border trade throws up, from currency movements and regulatory compliance to documentation risk and non-payment.

The real economy problem

The importance of the asset class is that it sits close to the real economy. The underlying goods collateralise these loans, which typically liquidate themselves as delivery completes and payments come in. The lender’s toolkit can include collateral management, control of title over the goods and ring-fenced cash flows.

For advisers, this gives the asset class a tangibility that most credit lacks: repayment is tied to specific trade flows, not an abstract corporate balance sheet story.

Trade finance has remained resilient despite the series of shocks that form the polycrisis, including the pandemic, supply chain disruption, rising inflation, higher rates, Red Sea disruptions and shifting tariff regimes.

Global trade has continued to demonstrate resilience. Essential goods still need to move, even as the policy and geopolitical backdrop grows more complex. Trade volume has risen 6.3 per cent since 2019 and 19.1 per cent against the 2015 average.

A further structural driver is the growth of South-to-South trade among developing countries. Federated Hermes cites expectations that this segment could rise from 17 per cent of total global trade in 2010 to an estimated 40 per cent by 2030.

The gap bites hardest in emerging markets, where constrained bank credit and thin working capital leave distributors dependent on external liquidity to finance the movement of essential goods.

The shortage of trade finance exists partly because the asset class is operationally intensive. The opportunity has been largely untapped by asset managers because of high operational costs, asset granularity and short instrument tenors.

This is an important caveat. It is not a generic yield product, it is a specialist credit exposure that depends heavily on sourcing, legal structuring, collateral oversight and risk management.

From funding gap to portfolio allocation

The investment case flows from that complexity. The potential benefits of trade finance are alpha potential, diversification, high income potential, low volatility, short duration and uncorrelated returns.

The default numbers are striking. Trade Finance Global recorded a 0.02 per cent exposure-weighted loss given default rate on export lines of credit in 2023, and 0.10 per cent on imports. Transactions also carry low interest-rate and credit-duration risk, floating at a spread over a short-duration index such as SOFR.

For portfolio construction, a key point is how the return stream behaves relative to conventional assets. The Federated Hermes Trade Finance Fixed Income Composite had a 0.16 correlation to the S&P 500 Total Return Index, 0.35 to JPM EMBI+ and 0.36 to the S&P Leveraged Loan 100 Index over a 15-year period.

Trade finance opens up a vast and underfunded part of the global economy. But the allocation case should be built on evidence, not novelty. The strongest argument is that a US$2.5 trillion capital shortage exists in a market that facilitates most of world trade.

Likewise, the asset class has historically offered short duration, floating-rate income and low correlation to mainstream markets. All qualities that make this asset class well worth a closer look for clients that are seeking regular income from different drivers of yield.