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What Do Hedge Fund Investors Think of the Cloud?

By Mary Beth Hamilton,
Thursday, October 11th, 2012

Earlier this year we conducted a survey looking at adoption of cloud services within the investment management industry. One question looked at barriers to adoption of cloud services. We found that 62 percent of those surveyed said a significant “barrier” to cloud deployment was that their investors and/or clients are not receptive to the idea of cloud computing. However, nearly a quarter of firms surveyed (23%) said this factor was not very significant or not significant at all.

Education continues to play an important role here, and both investment firms and investors seem to be more open to the cloud than in years past. We expect this trend to continue as cloud services become mainstream.

One reason investors are becoming more comfortable with the cloud is that it helps hedge funds easily put institutional caliber IT infrastructures in place efficiently and effectively. It virtually goes without saying that investors are increasingly seeking transparency from hedge funds, particularly as the regulatory landscape continues to evolve. Investors have raised their expectations in recent years and put a large focus on operational excellence, signifying that more than ever, firms need to have their operations and technology practices in place to support their day-to-day trading strategies.

Investors want to see that funds have implemented comprehensive systems and practices to protect their assets. This includes a disaster recovery plan. While disaster recovery is somewhat inherent in the cloud (since data is stored “off-site”), there are differences between DR offered by public versus private cloud providers. Particularly, there is little known about how and when public cloud providers actively test their DR systems and what information is shared with end users.

With a private cloud, firms can gain more visibility into the DR practices undertaken by the cloud provider as well as have features such as regular DR tests – a practice investors expect to see from institutional caliber hedge funds. 

Finally, investors also want to ensure that hedge funds are compliant from a regulatory perspective. Currently, the SEC advises funds to retain all internal and external email and instant message communications that are business-related. Many private cloud offerings, such as Eze Castle’s, offer firms email and IM message archiving, which will allow firms to store communications for the designated period of time and recover any necessary communications in the event of an SEC inquiry. Some public clouds, however, are unclear on whether they offer such a service.

We expect the trend of hedge fund investors accepting cloud services as the norm to increase.

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