Retail investors might look for public securities on stock exchanges to invest and earn profits. Similarly, large-scale investors might place IPO bids to take control of shares. They might also invest in commodities, bonds, derivatives, and other financial securities to increase their bank balance. Unlike institutional and retail investors, HNIs, UHNIs, and other wealthy individuals might not depend on securities with a small profit margin.
They might want to play the big game by investing in non-traditional assets offering high returns. It is where hedge fund services come into the picture for wealthy individuals. Let us discuss more about hedge funds and the role of outsourcing for firms.
What exactly are hedge funds?
A hedge fund is a limited and private partnership of several investors. The investors within a hedge fund are usually HNIs (High Net Worth Individuals) and UHNIs (Ultra High Net Worth Individuals). These are wealthy individuals having large amounts of money and want to generate significantly high returns. You might consider hedge funds as collective investment schemes, but they are not. Since hedge funds are partnerships between different investors, they are considered firms.
A hedge fund will collect funds from wealthy individuals and apply different investment strategies to amplify them. Hedge funds aim at providing exceptionally high rewards to investors who have offered large amounts of money.
Firms offering hedge fund services will have managers to implement investment strategies. Fund managers will do whatever it takes to provide high returns to investors. Fund managers look towards non-traditional assets since traditional investment instruments might not generate exceptionally high returns. Hedge funds might invest in alternative currencies, private equity, distressed debt, real estate, collectables, commodities, and other assets to earn returns.
Hedge fund managers can rely on leveraging, long/short equity, arbitrage, and other investment strategies to generate high returns. Since hedge funds deal in non-traditional assets, the level of risk is high. The fund manager is responsible for mitigating risks affecting the return of hedge funds.
How can firms improve compliance with hedge fund outsourcing?
Firms offering hedge fund services indulge in multiple processes, from investment analysis to exit strategy preparation. Since hedge funds cater to the needs of wealthy individuals, they need to achieve efficiency in their operations. To do so, hedge funds might look for outsourcing services. They can shift their hedge fund operations to a third party and reduce the overall burden. Here’s how hedge fund outsourcing can help improve compliance:
Expert opinion
Hedge fund firms have financial experts to identify effective investment strategies. However, there is still room for more experts, considering the stakes are high. Since wealthy individuals put their money in hedge funds, fund managers try to provide them with high returns. By partnering with a reputed firm, hedge fund firms can bring expert opinions to the table. The chances of messing up with the investors’ money will be less. Third-party experts will not only help with investment decision-making. They will also help the hedge fund firm to improve its compliance status.
Standardised compliance processes
The key to achieving a better compliance status is standardisation. You cannot improve compliance without streamlining all operations and business activities. Hedge fund firms have multiple departments and processes. When all those are streamlined, the chances of compliance errors are less. Internal employees cannot streamline different operations because they don’t have a unified view of the firm.
On the other hand, an outsourcing firm will have a unified view of a hedge fund firm from the outside. Different compliance processes like communications surveillance, AML, and risk mitigation are streamlined with the help of a reputed third-party outsourcing firm.
Use of technology
In today’s era, compliance management is not an easy task for hedge fund firms. There is a wide range of regulations and norms for hedge funds decided by government entities. It is not possible to look after all compliance requirements manually. Hedge fund firms must leverage the power of technology to enhance compliance processes.
For example, AML monitoring can be automated with the help of AI-led security solutions. Similarly, monitoring solutions can be used to analyse trades in and out of the hedge fund. A firm might not adopt technology instantly to improve compliance but can seek help from an outsourcing partner.
Cost cutting
Hedge funds cannot ignore compliance requirements, as they might attract penalties and restrictions from regulatory authorities. For the same rationale, they are willing to spend a fortune to maintain the compliance status. Luckily, hedge fund firms can outsource compliance processes and save funds. They will also end up saving their in-house resources used for compliance processes.
Conclusion
Hedge fund outsourcing allows firms to become more flexible. With the help of an outsourcing partner, hedge fund firms can easily scale. However, hedge funds need to choose an effective outsourcing partner. Look for a reliable hedge fund outsourcing partner right away!