Fashion brands gamble on tariffs: a hedge fund feeding frenzy
The Supreme Court’s February ruling against Donald Trump’s IEEPA tariffs left fashion brands facing a perplexing dilemma: wait indefinitely for promised refunds, or sell those claims at a steep discount to navigate a liquidity crunch. What’s emerged is a quietly frantic market, fueled by hedge funds and a whole lot of uncertainty.
The rise of tariff claim trading
Billions in import duties, initially absorbed by brands, are now being traded like commodities. The administrative delay in returning an estimated $166 billion—a sum that’s frankly staggering—has been ingeniously re-engineered into a financial instrument. Hedge funds, notably King Street Capital and Oppenheimer, are aggressively approaching importers, offering to buy these refund claims at a discount for immediate cash. Banks are facilitating these deals, acting as matchmakers without taking on the risk directly – a clever sidestep, to say the least.
Tom Janover, partner at Herbert Smith Freehills Kramer, notes, “It’s a dynamic situation. Each company’s motivations are distinct, requiring individual negotiation.” And the sellers aren’t solely distressed brands, as early narratives suggested. Larger companies with sophisticated treasury functions are participating alongside smaller players, united by a shared desire for liquidity, a recognition that waiting for the government carries its own, significant risks.
A bird in the hand is worth two in the bush
As Neil Saunders, managing director of retail at GlobalData succinctly puts it, “No one really knows what the process for refunds looks like, or how long it will take, or if it will even actually happen. This is very much a ‘bird in the hand is worth two in the bush’ mentality.” The structure is familiar to the fashion industry – a direct extension of factoring, converting a future receivable into immediate cash. The calculus, however, is shifting rapidly.
The cbp's timeline & lingering questions
On March 31st, Brandon Lord, executive director of trade programs at US Customs and Border Protection (CBP), offered a glimmer of hope, declaring that refunds could begin as early as June. CAPE, the Consolidated Administration and Processing of Entries system, is 85% complete, with Phase 1 covering roughly 63% of import entries. But here's the rub: the remaining 37%—entries flagged for reconciliation, subject to drawback claims, or otherwise excluded—face an indefinite delay. Even for qualifying entries, a 45-day processing window remains after a CAPE declaration, delaying payment further. Only 78% of importers have completed electronic payment registration. The sense of urgency, it seems, is not entirely misplaced.
The reputational risk & public scrutiny
Many publicly traded companies are opting out of claim sales, wary of the disclosure implications of accepting a fraction of what they’re owed. Explaining this decision to shareholders presents a tricky reputational calculus. But some privately held brands are fielding unsolicited proposals, as Aaron Sanandres, co-founder and CEO of Untuckit, confirms: “It’s always interesting to see where the market is valuing these receivables, as it hints at the market’s expected timing to collect.” It’s less about the intrinsic value of the claim and more about the time horizon.
The factor's perspective and potential lawsuits
Eric Fisch, senior vice president at HSBC, emphasizes the strategic advantage of liquidity: “Having liquidity puts you in a stronger competitive position – and that’s never something brands should second-guess.” Gary Wassner, CEO of Hilldun, points to the cash-flow realities of the industry, where costs are incurred months before merchandise reaches retailers. The tariffs, expensed by most brands, represent recovery rather than anticipated revenue, a critical additive for cash flow, especially given weakening consumer sentiment.
But the situation isn’t without its complications. The CBP’s filing regarding open protests—a standard legal safeguard—now excludes those entries from Phase 1. Angela Santos, partner at ArentFox Schiff, cautions, “We might need to recommend a smaller scope of entries for protests.” Adding to the complexity, class-action lawsuits are targeting brands that raised prices in response to the tariffs, potentially exposing them to reimbursement demands.
As Julie Hughes, president of the USFIA, aptly concludes, “One definite issue is the class-action lawsuits. It’s a complicated question. Some companies raised prices to cover the tariffs, others did not. Some small businesses especially need the refunds to stay in Business.” The clock is ticking, and the fate of these refunds—and the brands that rely on them—remains precariously suspended.