February 24, 2015 / 2:30 PM / 4 years ago

Hedge fund Scipion Capital fills commodity trade finance gap

LONDON (Reuters) - Hedge fund manager Scipion Capital is hoping to appeal to institutional investors disillusioned with poor commodity fund performance by offering an alternative - a commodity trade finance fund that delivers decent steady returns.

In recent years some banks have reduced their commodity trade finance activities as regulators have cranked up capitalization requirements, squeezing the margins on offer.

At the same time, investors who have repeatedly lost money in commodities are quitting the asset class altogether or looking for a different form of exposure with lower volatility.

Aside from a few big names such as Blackstar Capital Partners, commodity trade finance funds have tended to fly under investors’ radar, but interest is building.

Hoping to tap this demand, Scipion Capital, a hedge fund company founded by Nicolas Clavel in 2007, is taking its African Opportunities Fund to the broader institutional investor market.

“We’re looking for sticky money - we don’t want too much hot money from funds of hedge funds,” Clavel said. Existing investors include family offices and wealthy individuals.

The credit fund makes short-term, secured loans to cover the transport of commodities from the African interior to the port, or vice versa.

In 2014 it returned 6.79 percent, when the average actively managed fund in the Lipper Global Commodity fund sector was down 14.35 percent, and it has never had a negative year.

The fund makes money by taking on risks that banks can’t or won’t lend against, such as funding gasoline or diesel shipments from an oil major’s refinery in Europe to Ghana.

“The trading houses are doing more in this area but they are also having capacity issues, so then they talk to people like us,” Clavel said.

Most loans earn a return of about 8 to 18 percent per annum, but Clavel stressed the importance of having good collateral managers on the ground to take care of any problems.

“You do have logistical issues to deal with - that’s why you need a solid team who understand the business. For example, they might drive a route to check that it’s actually navigable after the rainy season.”

The availability of credit in the local banking system will also influence where the fund invests. “We’re doing our first deal in Kenya after seven years - until recently it was extremely liquid, so they were offering low interest rates and the risk/reward ratio was not what it should be,” Clavel said.

“In the DRC it was the other way around - the interest rate for a top corporate went from 26 percent to 8 percent.”

Attractive investments include high consumption commodities such as imports of cement or bitumen, or exports of cocoa, coffee and cotton. “We like low value commodities because then the logistics become key, the margins are better for the borrower and we can get a better return,” he explained.

For example, a trader buying copper in the Democratic Republic of Congo (DRC) can get a discount by paying at the mine rather than at the port because of the cost of transporting that copper overland.

Reporting by Claire Milhench; editing by Susan Thomas

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