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Bob Guilbert

Eze Castle Integration

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Innovations in Trading and Technology

19 August 2013

How the Cloud Is Transforming the Hedge Fund Industry

The great impact of the cloud is realized as it transitions responsibility and management of technology from the fund itself to the cloud provider, allowing the firm to focus on its ultimate goal: raising assets. Here are tips to help you get the most out of your cloud strategy.

With IT capabilities increasing at lightning speed, the close link between strategy and execution is more critical than ever to business performance. At the same time, the technology landscape is changing as rapidly as ever, as businesses recognize the favorable impact cloud computing offers and its ability to deliver institutional-quality IT to hedge funds and investment firms of all sizes.  

Ten or 15 years ago, hedge fund technology was managed by a dedicated, in-house IT professional, and operations were housed in a firm’s on-site communications room – a costly and labor-intensive resource. With the adoption of cloud computing, investment firms can operate more effectively and efficiently, as they leverage a third-party provider to manage their infrastructure, storage, security and disaster recovery solutions. 

Cloud computing has immense benefits for both emerging and established hedge funds. The cloud allows start-ups to achieve institutional-caliber operations quickly and simply, and the transition from capex to opex is a particularly crucial driver for funds looking to launch. For established firms, the cloud enables them to easily add and manage new applications, such as order management systems (OMS), accounting platforms and risk systems. The great impact of the cloud within the industry, though, is realized as it transitions responsibility and management of technology from the fund itself to the cloud provider, thereby allowing the firm to reallocate its existing IT resources to higher-value projects and focus on its ultimate goal: raising assets.

Core IT Building Blocks: From Bottom to Top

The foundation of any solid IT environment begins with a highly resilient IT infrastructure that is managed at all times. The infrastructure starts at the data center level, where hedge fund firms should look to leverage Tier II- and Tier III-class facilities that hold SSAE-16 certifications.

[Related: “New Life In the Cloud for Mainframes?”]

Servers, storage and networking infrastructure should include redundant layers to maximize efficiency and provide additional layers of protection from both human and environmental threats. Cloud services providers should use best practices for security by taking a multi-layered approach and using intrusion detection services to thwart security attacks.

Another critical building block for effective technology is the management of the IT services and the ability to deliver comprehensive disaster recovery. It is imperative to have a responsive IT support team to service users and monitor systems. Many private cloud platforms combine these fundamental elements, which streamline the IT “building” process considerably for both new and existing hedge funds.

Considering Your Firm’s IT Approach

As you evaluate your firm’s approach to technology, there are a host of critical decisions you will need to make. First, you’ll need to determine if your firm will manage its own IT on-site. As noted earlier, this approach can be costly and requires more dedicated internal management and monitoring. Additionally, firms that manage their own technology should take care to plan for growth and prepare a development plan to avoid outgrowing their IT environment too soon.

The more common approach for firms today is to leverage the cloud. But the decisions do not end there. Will your firm use a public or private cloud approach? The two are vastly different.

Cost

At a basic level, public clouds are less expensive and, naturally, appealing. But the services offered by such public cloud providers can be limited (see below), and therefore firms should be cautious about placing too much emphasis on cost when making their IT decisions.

Knowledge, service and support

The hedge fund industry is a unique one, and firms demand uptime to ensure profitability. Therefore, firms should look to leverage industry-specific, private cloud providers with a deep knowledge of the financial markets and an understanding of their priorities. Public cloud vendors, on the contrary, are generic and are not focused on the financial services sector. There is an inherent lack of knowledge around the unique needs of hedge funds – a limitation that could severely affect a firm’s success.

Public clouds, such as Google and Amazon, also offer limited IT support and customer service, given their rather large and broad nature. Troubleshooting of even the most basic desktop issues can be a challenge, and outages can be more prolonged and detrimental. With a private cloud provider, firms can rely on 24x7x365 support from a hedge fund-specific group of professionals.

Application integration

Beyond basic day-to-day business functionality such as email, file services and storage capacity, hedge funds and investment firms also require specific applications and connectivity to manage their operations and execute trades. Order management systems (OMS), portfolio accounting packages (PMS), and connections to market data and FIX networks are just a few examples of the critical integrations firms require. With a private cloud, this is simple. A public cloud, however, does not easily integrate with these hedge fund-specific applications, typically due to necessary third-party hardware and networking connectivity.  

[Related: “Historical Data Focus Needs Less Back-Testing and More Forward Thinking”]

Security

Another critical consideration involves security – one of the most important factors to note in the financial services industry. While much remains unknown in the public cloud sector, larger sites such as Google or Amazon are inherently more susceptible to security threats and hackers. Private cloud providers are more likely to employ industry best practices and maintain strict security controls that can be managed and monitored closely.

Each of the above factors plays an essential role in clearing the path for hedge fund success, and firms should take careful time to analyze and evaluate their IT options. It’s also important to note the effect investors are having on IT decision-making today. With due diligence requests at an all-time high, investor expectations are increasing, and they expect hedge funds to employ robust and secure infrastructures to manage and protect their assets. Funds should think carefully about the impression they will make on investors when they choose a public or private cloud path.

The future of the cloud looks undoubtedly bright.  The positive trend toward cloud computing appears to be irrefutable; the remainder of the industry will likely be converting over in no time.

Spotlight-white-trans For more stories in the Innovations in Trading and Technology Spotlight Series click here.

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1 Comment to "How the Cloud Is Transforming the Hedge Fund Industry":
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    skbryan

    20 August 2013

    I'd like to see a list of impartially recommended energy industry specific providers.  Any end users want to chime in?

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