The technology treadmill is a tough place to be these days. Technology refresh cycles last only a mere three years, forcing firms to replace their infrastructures and make costly software and hardware upgrades on a too-frequent basis. And with hedge fund budgets tighter than ever, many firms cannot afford to stay on this path.
But the hedge fund technology treadmill is not a firm’s only option. Costly in-house, 'traditional' IT services have given way to more cost-effective outsourced IT and managed services that get firms off the treadmill and on a path to success.
Let’s have a look at some of the key reasons why hedge funds and other investment management firms are moving from on-premise technology infrastructures to cloud and managed services.
Keys factors driving hedge funds to managed services
Many firms are turning to managed IT services because it allows them to align their IT requirements with their business needs, including tighter control on budgets and staff. Moving to a managed service platform provided by a reputable outsourced IT provider not only makes it easier to deploy technologies, but also allows firms to benefit from platforms inherently designed to meet the constraints of limited IT resources and budgets.
Traditionally, hedge funds and private equity firms have allocated significant capital budgets to build out their own sophisticated Communication (Comm.) Rooms, which can take months to provision and bring online. With servers to buy and install, software to license and configure, and voice/networks to deploy – not to mention recruiting, hiring, and managing expensive and hard-to-find IT talent – it’s no wonder cloud solutions have emerged as the dominant choice for computing infrastructures at investment firms large and small.
Not surprisingly, many investment management firms – including those with well-established in-house infrastructures – are making the move to the cloud for a number of compelling reasons, most notably these five:
Timing. Understanding when the right time to move to the cloud might be is a smart first step. There are three typical inflection points: when you’re adding new applications, moving or opening a new office, or in need of an IT refresh. But even if you’re not under any of those circumstances, there are a lot of motivating factors (keep reading).
Cost Containment. You may not always be able to reduce the cost of IT in the long-run with the cloud (depends on your firm’s size and scope), but you will have a predictable budget to work with, which means you can contain costs and create greater predictability and smoother, linear cash flows. As an added bonus, you can better allocate funds to other strategic projects and areas more directly relevant to the business mission. Even within the IT discipline, instead of spending time on mundane, daily operation of commodity IT resources, the firm can focus on proprietary application development, application integration, cyber security protections or other strategic initiatives.
Hedge fund outsourcing is not a new trend, as buy-side firms have long dispersed the responsibility of many functions to third-party service providers more adept and accomplished at said functions. Technology, for example, is an area where many firms choose to leverage outsourced providers to manage complete or partial infrastructures, support projects or supplement on-site IT staffs. The benefits to outsourcing are numerous, but the true measure of a successful service provider relationship comes when an investment firm’s level of risk in using that provider is low.
Risks are everywhere, particularly in today’s cyber-focused environment. But the risk a hedge fund undertakes when outsourcing a function of its business to a third-party is enormous. Not only is the firm relinquishing control to an outside company, it also takes on the added burden of managing that company, in addition to its own.
It’s one thing to put faith in your service providers to do their jobs effectively. It’s another to ignore your own firm’s responsibility to manage that third party as a means of protecting your own firm. Successfully managing risk associated with third-party service provider relationships is a full-time job, especially for financial services firms working with dozens of various parties. Here are a few tips to help your firm properly manage third-party service provider risk:
They say the more things change, the more they stay the same. Turns out it’s a pretty accurate assessment of the hedge fund industry then and now.
You see, back in 2011 we hosted a “State of the Hedge Fund Industry” event that yielded some interesting trends and perspectives, and we thought it might be fun to not only look back at those trends, but compare them to what we’re seeing in today’s industry – more than five years later.
Like I said: the more things change, the more they stay the same.
Hedge Fund Market Trends & Challenges
THEN (2011): It’s been an interesting year thus far for hedge funds and other alternative investment firms, as inflows have been high but performance low. In addition to performance challenges, hedge funds continue to deal with increased competition for investments, and thus asset-raising remains a hurdle for many funds – regardless of their size or strategy.
When evaluating a cloud services provider there are a lot of factors to take into consideration: features & functionalities, security protections, provider experience, and industry certifications just to name a few. We've identified some of the most important questions today's investment management firms should be asking cloud services providers during the selection process.
Five or seven years ago, these questions would probably be fairly basic in nature. Does the infrastructure isolate individual client environments? (Yes). Can the cloud environment scale to meet a firm's growing resource needs? (Yes). In 2017, we can safely assume you understand the basics of the cloud, so the questions we've identified move beyond the basic and focus on critical infrastructure, security and support questions your cloud provider should be able to address.
Top Ten Questions to Consider:
I'm most concerned about the security of my data. What types of security layers do you employ across the cloud platform and your broader organization to guarantee the safety of my firm's information?
Does your cloud leverage proactive security technologies such as intrusion detection and prevention, next-generation firewalls and regular vulnerability assessments and/or penetration tests?
We educate our clients all the time about how to keep their organizations secure and mitigate against insider and outsider threats. But one area of security often overlooked is that of the home office – and the home itself on a larger scale. With new technologies constantly being released – and many of today’s devices linked via the Internet of Things (IoT) – the likelihood of being hacked or having private information stolen also increases.
Emerging ‘smart’ technologies such as Amazon’s Echo and Google Home are making their way into many homes, making it simple to find for users to stay up-to-date on the latest news, ask for directions, or hear tomorrow’s weather forecast. The Echo’s voice assistant, Alexa, for example, can complete advanced tasks such as turning on lights and changing the temperature of your home.
But what if these technologies are jeopardizing the inherent privacy of your own home? Let’s take a look into the future.
Technology innovation and evolution has had a profound effect on many jobs, perhaps most notably for a firm’s Chief Technology Officer. Once tasked with desktop support and server maintenance, these IT executives have seen their job descriptions change dramatically over the years. But that change doesn’t necessarily signal something negative.
Our Private Equity CTO Survey asked these technology experts directly how they spend their time and what they view as the new and evolving role of the private equity CTO. Their answers highlight a transformative shift from technology troubleshooter to strategic thinker.
With the advent of outsourcing and the cloud, many feared or expected the CTO role to diminish. So perhaps the most notable finding of our survey is that 93 percent of respondents believe their firm’s CTO or top IT executive is becoming more important to their business. The vast majority of private equity IT execs are becoming more focused on managing relationships with contractors, cloud and other IT service providers. This increased focus is in alignment with the trend of today’s progressive CTOs drawing on cloud technology to create agile firms that can quickly deliver the applications users require – and working hand-in-hand with outsourced providers to support the organization’s technology and operations objectives.
Most firms (85 percent) also see the CTO becoming more involved in driving the firm to meet regulatory and compliance demands. This is especially true as regulators outline data protection and cybersecurity expectations that can only be fully addressed through the use of technology. Additionally, regulators’ expectations around third-party due diligence has increased, placing more responsibility on CTOs to execute thorough risk assessments on the contractors, cloud, software and IT service providers used by the firm.
It’s time to take another close look at the results of our 2016 Private Equity CTO Survey, this time with a careful eye on how private equity firms are leveraging outsourcing and cloud services.
Private equity outsourcing is growing in popularity – and we discussed many of the reasons why at length in a September webinar which you can listen to here. Our survey findings tell us that the average private equity firm is outsourcing about 30 percent of IT, with of course, some firms outsourcing less frequently and some outsourcing more.
On the whole, most firms are leveraging outsourced third party providers for between 20 and 40 percent of their IT functions. Firms managing less than $100M in assets are the most likely to outsource greater portions of their IT services, likely given their lack of internal staff and resources.
Overall, firms’ propensity to manage technology via in-house resources, outsourced providers or contract work is expected to stay consistent in 2017, as evidenced by the graph below.
As you probably recall, our 2016 Private Equity CTO Survey – which we released at the end of November – highlights key IT priorities and investment areas driving private equity firms in 2017. And while we shared some high-level findings at the outset, we’d like to take the opportunity to dig a little deeper into some of the survey results over the next two weeks. Since the survey itself covered four primary areas, our next four Hedge IT articles will examine each of these areas independently and highlight some of the most interesting and thought-provoking findings.
To kick us off, let’s start by taking a look at some critical business priorities for private equity firms in 2017.
Drivers for Private Equity IT Investments
We all know and appreciate how technology can impact our day-to-day operations. For private equity firms, advances in technology have enabled their businesses to become more efficient and drive growth across the entire organization.
When asked to identify the top drivers impacting IT spend in the next 12 months, survey respondents highlighted the need for increased protection against growing cybersecurity threats, a desire to improve the investor/client experience, and the goal of improving efficiencies by refreshing outdated or legacy technology.
2017 is quickly approaching and so are a plethora of new financial technology and operations articles here on Hedge IT. As we wrap up 2016, let’s take a look back and share some of our readers’ favorite articles from this past year.
Tips for launching a hedge fund are always popular on Hedge IT, and 2016 was no different. Earlier this year, Eze hosted a webinar featuring speakers Paul Schultz from Wells Fargo, Michael Mavrides from Proskauer Rose LLP, and Bob Guilbert from Eze Castle Integration. A few key takeaways from the 1-hour event include:
Understand that investors will expect enterprise-grade technology built in from Day 1.
Remember the advantages of the cloud: a predictable cost, flexibility and scalability (“tech on demand”), enterprise security, and professional management and monitoring.
Compare both the benefits and disadvantages of a “master fund” versus a “side-by-side” structure (e.g. the master fund allows for one set of books and trades, while the side-by-side structure allows for more tax flexibility)
Show investors that you have a 3+ year budget for working capital without any performance fees.