2024 was a landmark year for global financial markets, culminating in a whirlwind election relief rally for the S&P 500 in the wake of Donald Trump’s resounding reelection to the White House which saw the index briefly surpass 6,000 for the first time. However, institutions are increasingly looking at risk management solutions as uncertainty for next year looms.
Even despite much of the decade being punctuated by unexpected market movements in the wake of the COVID-19 pandemic and subsequent inflation struggles while an AI boom period sent markets higher, 2025 appears set to be a year full of opportunities and headwinds alike for investors.
Although geopolitical headwinds had failed to quell enthusiasm for market growth throughout a number of global economies last year, unrest in the Middle East, and Eastern Europe, and the return of Trump could unite to bring greater risk to Wall Street over the coming months.
Dangers like supply chain disruptions, high trade tariffs, the return of inflation, and the future growth of the AI landscape will all factor heavily when it comes to managing market movements. But for hedge funds, the uncertainty of the year ahead will be the perfect stress test for burgeoning risk-management innovations.
Risks to Market Growth in 2025
The resounding Republican red sweep in the wake of the November 5 election means that Donald Trump will have more power than ever before when the President-elect returns to office in 2025, but what could this mean for markets?
Trump has already been outspoken in his plans for his second term and has suggested that trade tariffs of 25% for Canada and Mexico, as well as an additional 10% tariff on Chinese imports, should quickly come into effect in response to concerns over immigration and the import of illegal drugs into the US.
The President-elect also appears to be focused on significant deregulation throughout financial markets and industrial sectors, as well as adopting a more friendly outlook for cryptocurrency.
While Wall Street has responded positively to the prospect of deregulation as a growth-focused strategy, a more stringent stance on immigration could see US talent pools weaken. Fiscal experts also believe that the imposition of high tariffs could lead to the reemergence of high inflation as extra costs are passed onto the consumer.
With forecasts suggesting that Trump’s policies could push national debt $7.5 trillion higher, we could see Wall Street’s early enthusiasm for the President-elect fizzle out in 2025. However, Abrdn analysis notes that inflation could become stuck at 2.5%, resulting in a pause in the Fed’s interest rate cuts at around 3.5% to 3.75%.
While Trump has claimed that he’ll be a strong negotiator for peace amid escalating conflict in the Middle East and Europe, intensifying geopolitical struggles have caused widespread disruption throughout international trade.
At present, growing volatility is causing Brent oil prices to rise, which can have a knock-on effect throughout all energy-dependent sectors.
Data to Overcome Uncertainty
Hedge funds are fighting back against the uncertainty ahead in 2025, and many leading firms are utilizing big data to drive more analytical decision-making when it comes to risk management.
The ability to store and assess big data and convert insights into actionable advice has become essential for risk management, and many firms now focus on storing long-term PnL histories that encompass entire market cycles.
By assessing PnL alongside position history and associated historical PnL vectors, hedge funds can assess their VaR evolution over designated time frames, and can undergo back-testing and more informed creation processes when building new training models.
These data-based risk profiles can help to offer real-time pre and post-trade analytics that adapt to more volatile market conditions for more sustainable solutions.
This access to data helps prime solutions for hedge funds to provide effective global market access for faster trading without the risk of errors in decision-making.
The Evolving Role of Machine Learning
In 2025, more hedge funds will be challenged to ensure that their real-time analytical solutions can keep up with growing datasets. The AI revolution may be a key cause for market uncertainty as the technology continues its development, but innovations in machine learning (ML) are likely to pave the way for better risk management solutions among hedge funds to navigate the uncertainty ahead.
By learning from the real-time analytics provided by big data, ML can help run a multitude of ‘what if’ simulations to help hedge funds become more agile as markets move unexpectedly.
The voracity of machine learning tools will grow alongside the availability of big data analytics, and with more hedge funds utilizing satellite imagery to steal a march on their rivals, we’ll see unstructured data insights become a core component of modern risk management.
With uncertainty sweeping the geopolitical landscape, the satellite imagery that has been utilized to identify crop yield and coal mine output in recent years will increasingly focus on retailer foot traffic through parking lot capturing and global oil inventories as a means of better understanding the extent of market movements at scale.
Navigating The Year Ahead
Hedge funds are accustomed to thriving on volatility, but the year ahead may be a major challenge that only the most resourceful firms are in a position to overcome. However, with significant opportunities to be found among the sternest of challenges, we can expect institutional investors to be looking forward to the surprises that 2025 has in store.
With the right commitment to big data and AI analytics, hedge funds could be in a position to make significant gains in the new year. With uncertainty likely, technology will pave the way for prosperity for Wall Street’s biggest institutions.
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