In the post-globalization era, international markets have been growing steadily except during certain situations such as the 2008 Global Financial Crisis and the COVID-19 pandemic. One major aspect of the rising volume of trade and commerce is the growth in investment by multinational giants in different sectors of the economy. This trend has led to new mechanisms that help foreign institutional investors (FIIs) put their money into businesses of their choice. Hedge funds are one such technique that aids large firms to finance small and medium-scale enterprises, entrepreneurs, and start-ups seamlessly.
Rise in Preference for Hedge Funds to Maximize Profits in Post-Pandemic Period
During the COVID-19 pandemic, the lockdowns and social distancing norms imposed by various governments led to the shutting down of various businesses and companies. Several institutional investors lost huge amounts of money, leading to a slowdown in the global economy. To revive the markets in the post-pandemic period, many FIIs are opting for hedge funds to capitalize on the various opportunities.
Hedge funds, basically, are pooled investment funds established through a partnership between institutional or accredited investors. Compared to conventional mutual funds, these are not heavily regulated and involve a fair amount of risk. However, the profits earned by investors through these funds are much larger than traditional capital-raising mechanisms. Since the minimum amount of investment that is required to contribute to the pool is high, hedge funds typically target high-net-worth individuals and large firms. The most important advantage offered by these investment mechanisms is that they allow capitalists to diversify their portfolios ranging from real estate, stocks, bonds, currencies, derivatives, and equities.
Integration of Digital Technologies Strengthening the Position of the Industry
Recently, Allied Market Research published a report on the hedge fund market, which highlights that the hedge fund market is expected to gather a revenue of $13 trillion by 2032. The industry accounted for $4.8 trillion in 2022 and is projected to rise at a CAGR of 10.7% during the forecast period. Rise in deployment of advanced technologies such as AI and machine learning has played an important role in the expansion of the industry.
In the last few years, hedge fund managers have started deploying AI tools to analyze large volumes of financial information. Furthermore, these solutions have enabled investment banks to identify hidden patterns and create unique trade signals, thereby assisting in alpha generation. Moreover, the ability of machine learning algorithms to simplify complex financial data has enabled managers to cater to the evolving dynamics of the industry easily. In addition, ML programs help fund managers analyze the risks involved in a particular investment, thus aiding clients in making the right business decisions.
Over the years, the hedge fund industry has grown significantly. Many governments across the globe, especially in developed and developing countries, have enacted laws and legislations to regulate the functioning and operation of these funds. Leading investment banks are finding it difficult to adhere to these norms, thus restricting their growth. Digital technologies such as data analytics and machine learning have assisted companies in regulatory compliance tasks, enabling them to cater to a larger investor base easily. Moreover, several leading financial experts have stated that the use of technology has opened access to less-traded assets, thereby aiding clients in diversifying their portfolios.
The Bottom Line
The high-risk, high reward features of hedge funds have made them quite popular among wealthy clients and multinational companies. In the post-pandemic period, these funds have helped revive the global economy, thereby helping drive global economic growth. Integration of advanced technologies such as AI, machine learning, and data analytics is expected to open new avenues for growth in the industry in the coming period.
𝑨𝒓𝒕𝒊𝒄𝒍𝒆 𝒘𝒓𝒊𝒕𝒆𝒓: Akhilesh Prabhugaonkar
As the editor of the blog, She curate insightful content that sparks curiosity and fosters learning. With a passion for storytelling and a keen eye for detail, she strive to bring diverse perspectives and engaging narratives to readers, ensuring every piece informs, inspires, and enriches.
