A new multi-million-dollar secondary market has emerged, where hedge funds trade tariff refund claims owed to businesses in exchange for immediate liquidity.
Before liberation day last April, hedge funds sat poised, waiting to assess Washington’s policy direction. Fast-forward a year, and hedge funds are now seeking to capitalise on the $166 billion that US businesses had to pay in additional border duties due to the tariffs imposed by the Trump administration. According to a report by Fortune, this secondary market began to materialise last September, after courts began challenging the legality of tariffs implemented under the International Emergency Economic Powers Act (IEEPA).
In February, the Supreme Court officially declared many of Trump’s tariffs illegal. Ted Murphy, Partner at Sidley Austin LLP, explains how, since this ruling, the trade began to massively snowball. “Before the Supreme Court decision, refunds were trading for around 20 cents on the dollar; after the Supreme Court ruling, it was around 50 cents on the dollar, and now it’s upwards of 80 cents on the dollar.”
This price increase reflects a greater legal certainty for the trades. Before the ruling, a hedge fund might have offered a business 20% of the extra tariff costs they had to pay, in exchange for collecting the full amount when the refund is deposited. Now, funds are offering close to and upwards of 80% of what a business had to pay in extra costs, because of the increased chance that the refund will be paid. Hedge funds have also provided loans to businesses that need immediate liquidity, which is secured against the claim. These loans carry payment-in-kind interest, so the cost of the loan rises and is fully repaid when the refund is deposited. Reuters reported that these loans are being provided with a minimum size of $10M and backed by claims almost double in value.
Alex Hennick, President of A.D. Hennick & Associates, a firm that specialises in liquidity solutions, notes how this secondary market came to fruition last Autumn. “We had lenders reach out asking if we know of opportunities. At the same time, manufacturers are contacting us to see if we know buyers.” Many businesses across America needed financial relief and were uncertain about their fiscal future. A KPMG survey in February found that nearly 70% of firms had delayed major investments because of the tariffs. Hennick also noted that “in a tough economic environment where sales are down and costs are up, accessing even part of that money upfront can significantly help with cash flow and reduce borrowing costs.”
For hedge funds, the contingency risk is now diminished, with Hennick adding that “the uncertainty now is less about if they’ll get paid, and more about when and how long the process will take.” The trade now looks like a compelling opportunity; the upside may look relatively small, but funds could buy up several hundred of these refunds across a portfolio, creating scalable capital deployment that generates strong and steady returns. According to Wes Harrell, a managing director at Seaport Global, quoted in a recent Politico article, refunds are being traded between “$10-$25 million in face value”, with some claims “north of $100 million.”
Last week, the Trump administration created the Consolidated Administration and Processing of Entries (CAPE), which is expected to process and deliver refunds in 60 to 90 days. Murphy says this prospective timeline is appealing to investors as it “reduces both the legal contingency and the impact of the time value of money”. Before Cape was implemented, it was anticipated that tariff refund claims could take several years to materialise, given the US administration’s disapproval of the Supreme Court decision. Hennick believes the CAPE platform may see hedge funds become more targeted with their claims, especially “for smaller businesses in need of liquidity”, with larger ones able to see through the refund process and not seek immediate, external capital.
A maximum time frame of 90 days for the refunds to be processed also grants a degree of certainty for hedge funds. If refunds were to take several years, the expected annual return of the trade would be significantly higher, reflecting the greater risk involved. However, Daniel Pickard, Chair of International Trade and National Security Practise Group at Buchanan Ingersoll & Rooney PC, expressed caution in the refund process. “There remains considerable uncertainty regarding the timing for refunds on entries covered by future phases, such as entries under protest.”
Therefore, capital efficiency remains critical. Funds want to be nimble and move frequently in and out of different positions; having capital locked up in long-duration strategies is unattractive when, in other credit trades, those restrictions don’t exist. But in this context, tariff refunds are becoming a scalable niche within private credit. If institutional capital continues to flow in, returns may compress. For now, however, the trade offers a blend of speed and a high yield in an environment where alpha remains increasingly difficult to source.
