Hedge IT Blog

The countdown is on as the March 30, 2012 deadline for hedge fund and private equity managers to file their registration forms with the SEC, under the Dodd-Frank Act, is just around the corner. In reality though, most firms filed their Form ADV back in February to satisfy the 45-day review period.

However, the Dodd-Frank Act continues to spark change and much debate throughout the financial services industry. Just today the U.S. Commodity Futures Trading Commission (CFTC) “completed Dodd-Frank Act rules requiring swaps brokers to decide within minutes whether to clear a trade in an effort to reduce risk in the $708 trillion global swaps market,” according to Bloomberg news.

Dodd-Frank also requires that swap entities establish and maintain written business continuity and disaster recovery plans designed to enable them to resume operations with minimal disturbance to counterparties and to recover all required documentation and data.

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Operational due diligence has become a hot topic that continues to gain importance and attention throughout the alternative investment industry. Over the past few years, as regulations have changed and investors increasingly seek transparency, funds are spending more time than ever preparing for the due diligence process.

It is no surprise that the investment industry landscape is becoming more and more competitive. As this trend continues, investors are raising their expectations and looking towards funds that display the highest levels in operational excellence. One important way to ensure your firm meets these high standards is to complete a due diligence questionnaire (DDQ) that can be shared with potential investors.

A comprehensive DDQ covers a wide range of topics, from assets under management to audited financial statements and investment strategies. One major area of focus is the fund’s IT and accompanying security policies and procedures. At Eze Castle, we frequently assist our hedge fund clients in completing DDQ questions on technology, and we often see the same types of questions popping up. So, to help you get started, we have compiled the following list of some frequently asked DDQ questions.

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I had the pleasure of joining my colleague, Vinod Paul (managing director here at Eze Castle Integration), on a panel yesterday about disaster recovery at HFBOA’s Optimizing Hedge Fund Business Operations Conference in New York.

Titled ‘Disaster Recovery: An ounce of prevention is worth a pound of cure,’ we covered a range of topics with the overarching theme being that there is no excuse for a hedge fund not to have disaster recovery in place. To quote one panelist, “Nobody Gets a Pass” – including service providers.

Here are some of the highlights from the panel.

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Happy New Year! We hope your 2012 is off to a great start. Whether you’re launching a new fund this year or ramping up your existing firm, you should (and probably do) know how important your firm’s technology is and will be to your success. More so than ever, technology plays a critical role for hedge funds and investment firms, allowing them to streamline processes and communication, get a leg up on competitors in the marketplace and provide investors with the utmost confidence. 

One of your first technology decisions of the year is your most important one: do you want your fund to operate on a traditional, on-premise technology infrastructure or utilize the cloud? This decision will affect many of your other technology choices, notably the type of office hardware and connectivity you will require, so we urge you to do your due diligence and select the option that best suits your firm’s needs.

Once you’ve made your infrastructure selection, there is a seemingly endless list of additional technology requirements for your firm. Luckily, I’ve whittled them down here to focus on some top technology priorities for you to focus on as you enter 2012.

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This year, we’ve seen disasters of all kinds: snowstorms and blizzards, tornadoes and earthquakes, hurricanes and heat waves. They have their own motives and destruction paths, but each can be equally disruptive to investment firms and their daily operations. Disaster recovery solutions and business continuity plans are important tools to help firms prepare for these types of disaster situations, but without the proper education, their effectiveness is suspect.

To talk through some of these issues, we recently held a webinar featuring experts from Ridgefield Capital, Morgan Stanley and Eze Castle. Take a look at our recap below. To listen to the full event recording, click here.

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Last week, we examined some potential security threats within a cloud environment, including shared technology, data loss and unknown risk profiles. But these threats do not have to become realities for your firm’s environment. By doing your due diligence and selecting the right service provider, you can minimize the risk of a security threat in the cloud.

Proper security in a cloud environment requires specialized practices and processes at both the physical and virtualization level. Following are some key features to look for when evaluating a cloud services provider:

Physical Security at Data Centers

• 24x7x365 manned lobby with visual verification of identity
• Two-phase authentication of visitors (card and biometric)
• Secured access doors and elevator banks
• Monitored security cameras
• Additional door, motion and camera sensors
• Visitor logs for cages
• Key-locked cages and cabinets

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Ensuring infrastructure and data security is critical to any investment firm, regardless of whether its infrastructure lives on-premise or in a cloud environment. But there have been lingering concerns throughout the industry about security in the cloud for quite some time, particularly for hedge funds and other financial services firms who rely so heavily on the safety and security of their data.

The reality is that there are security concerns with any type of technology infrastructure. Doing comprehensive due diligence around cloud architecture, management, security policies and service providers will go a long way in satisfying those concerns.

Threats in the Cloud

The Cloud Security Alliance had identified some key threats for both infrastructure and application services in the cloud. They include:

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As we’ve talked about before, cloud computing is one of the hottest trends in the hedge fund industry right now. We recently hosted a webinar, Moving to the Cloud: Critical Considerations for Fund Managers, to talk through what’s driving this trend as well as some of the key factors hedge funds and investment firms should take into account when evaluating their technology infrastructure. The information below was presented by our expert panelists.

To listen to a replay of the event, click here.

What’s driving the move to the cloud?

There is little doubt that the movement to the cloud within the hedge fund industry is significant. For startup firms, especially, cloud adoption is becoming nearly universal. In addition to cloud adoption, the general trend toward outsourcing continues to grow, as investment firms realize that multiple aspects of their business can be outsourced (human resources, accounting, etc.).

There are a number of factors responsible for driving the cloud computing trend, including investor acceptance, the increased need for disaster recovery, staffing considerations, and, of course, cost.

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We recently hosted a panel at the Hilton New York to talk about some of the key challenges facing hedge funds today, as well as current trends in hedge fund technology.

Panelists included: Vinod Paul, Managing Director at Eze Castle Integration, Anurag Bhardwaj, Head of Strategic Consulting at Barclays Capital, and Vishnu Varma, Chief Technology Officer at Tiger Global Management.

Below is a summary of some of the key topics discussed at our recent seminar:

Hedge Fund Market Trends & Challenges

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.

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Earlier this week, we looked at the Financial Services Authority’s (FSA) requirements for mobile voice recording, which comes into effect November 14. In today’s blog post, we look further into the PS10/17 requirements as well as the hot topics discussed at our recent hedge fund technology seminar in London, focusing on due diligence, mobile voice recording and disaster recovery. Let’s have a look at the hot topics discussed by our panel of experts at our recent seminar:

Will investors give less focus to infrastructure in the future? Will the due diligence load lighten?

There is no sign that due diligence will lighten. In fact, more focus, especially with more institutional money hitting the FOFs, to ensure all risks are in the strategy and not the infrastructure. Remember most conduit investors’ “alpha” is in the quality of their due diligence process so expect to see further tightening. Growth has been exponential with little feedback to managers so it is extremely important to get strong service providers who can let you know the latest requirements.

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