It’s a question that many folks in the financial services industry have been asking for a few years now. Are potential investors comfortable with the idea of hedge funds leveraging cloud services? In Part 1 of our cloud webinar series, The Investor Perspective on Cloud and Security, we asked Ashley Gimbel, Senior Vice President at Dyal Capital Partners, to share her thoughts on evaluating the operational and infrastructure decisions of hedge funds and alternative investment firms and if investors are truly comfortable with the cloud. Click here or scroll down to watch the full replay of our conversation with Gimbel.
The simple answer is ‘yes.’ According to Gimbel, investors are and should be at ease with hedge fund clients using cloud infrastructures to support their daily operations. In fact, she says, hosted infrastructures often make more sense for firms with little to no IT resources in-house.
With a few caveats, of course. Firms should ensure outsourced cloud providers have proper Service Level Agreements (SLA) in place and are conducting appropriate oversight of their provider(s). A few other technology must-haves:
Well integrated data and systems
Established policies and procedures
Comprehensive disaster recovery
At Eze Castle Integration we see thousands of due diligence questions about hedge fund technology and operations each year. The questions around security are getting more specific with investors wanting details about each layer of a firm’s security stack.
A new question we’ve seen pop up one or twice centers around whether a firm’s online systems have undergone an ethical hack. So what is ethical hacking and how is it different from penetration testing?
What is Ethical Hacking?
Going back to our trusty security dictionary, SearchSecurity defines ethical hacker (aka white hat hacker) as a “computer and networking expert who systematically attempts to penetrate a computer system or network on behalf of its owners for the purpose of finding security vulnerabilities that a malicious hacker [aka black hat hacker] could potentially exploit.”
The increased focus on all things cybersecurity related – cyber-attacks, cyber warfare and cyber terror – has even led to the creation of a Certified Ethical Hacker (CEH) designation, which hacking pros can earn by completing online courses offered by the EC-Council.
In an interconnected world, there is a trade-off between enjoying limitless information at our fingertips and threats that are just one click away. Most of us have become so accustomed to being plugged in, that we forget the world is simultaneously plugging in to us as well.
The global evolution of cybercrime continues to push boundaries and raise the bar for technology innovation and advanced security solutions. Indicating the evolving regulatory landscape, the US Securities and Exchange Commission (SEC)'s Office of Compliance Inspections and Examinations (OCIE) announced back in 2014 that it planned to inspect the cybersecurity preparedness of over 50 registered broker-dealers and investment advisers. In 2015, their examinations will continue across the financial services industry, and firms are locking down security practices in advance of these inquiries. Additionally, in Asia, the Singapore Personal Data Protection Act governs the collection, use, and disclosure of personal data.
The amount of data and information that passes through the Internet every day is – for lack of a better term - enormous. And truth be told, sometimes we are sharing information that we don’t want to get into the wrong hands, whether it be via email, instant message or other communications. Think: credit card information, personal information (name, address, social security number, etc.), bank account information or sensitive company or financial data.
A secure way to transmit this information is through encryption. According to TechTarget, encryption is “the conversion of electronic data into another form, called ciphertext, which cannot be easily understood by anyone except authorized parties.”
The history of encryption, believe it or not, began a long time before the Internet existed and we started sending electronic data. The ancient Greeks and Romans, in fact, sent secret messages by substituting letters that only a secret key code could decipher. In the time of Julius Caesar, he created a cipher by which he shifted letters to the left or right to hide his messages.
In today’s market, the pressure from both investors and regulators is at a steady incline. Reporting obligations have grown complex, transparency is in high demand and compliance technology has become a vital component to a firm’s success. With various demands tug-o-warring hedge fund managers in multiple directions, a Client Relationship Management (CRM) platform could be the solution your financial firm has been searching for.
Introducing Ledgex CRM, the revolutionary, stand-alone Client Relationship Management solution launched today by our sister company, Ledgex Systems. Ledgex CRM is ideal for managing and tracking investor communications, sales pipelines, client relationships and capital movements. The highly configurable, centralized platform is tailor-made for hedge funds, family offices and asset allocators.
The new product offers the sophisticated Client Relationship Management capabilities necessary to raise and retain more assets, maintain and grow clients, provide outstanding client service and meet heightened reporting requirements. Out of the box, the web-based solution delivers efficiencies, transparency and flexibility without increasing headcount or costs. By streamlining investor relationship management and capital activity, Ledgex CRM enables managers to optimize their time and focus on fostering relations and growing business.
In this Opalesque.TV video interview, Bob Guilbert and Vinod Paul from Eze Castle Integration discuss the cybersecurity landscape of the investment community, specifically the risks facing hedge funds and alternative investment managers in 2015. Both spend the majority of their time educating their client base on internal and external risks, protecting them against the “Activist Hacktivists” looking for any means of entry into funds.
These hackers will spend weeks, months, and sometimes even years trying to get access, most often with the goal of triggering illicit wire transfers out of the fund.
Today, the usual efforts of employees to avoid clicking links or opening files and password protocoling aren't enough. Everyone should be aware of new techniques employed by hackers like “spearfishing” and “whaterhole” attacks which, with more institutional dollars flowing into hedge funds, will become more frequent. Unless funds have the right Written Information Security Policy (WISP) and processes in place, together with true intrusion detection that monitors what is coming into the firm and what data and information is going out of the firm, they can be at risk of a cybersecurity attack.
With a new year comes new regulations for hedge funds and investment firms. Earlier this week, Eze Castle Integration hosted a webinar during which Ricardo Davidovich, partner at Haynes & Boone LLP shared his insight into the Securities and Exchange Commission’s (SEC) new examination priorities as well as reoccurring themes firms should expect to see play out through the year.
What’s New in 2015
One priority for examinations this year is the focus on retail investors. Davidovich says that “hedge funds, which in [the SEC’s] mind have historically been an exclusive and private club, are being sold to the retail and consumer client base.” Meaning they will be taking a closer look at the types of fees being sold, the sales practices and the suitability analysis. Firms should focus on making sure no information released is misleading and that there are provisions against fraud. There should be a real emphasis on policies to create guidelines that can be shown and proven to the SEC.
HFMWeek Catches Up with Eze Castle Integration’s Managing Director, Vinod Paul, To Discuss How Technology Can Help Tackle the Challenges Facing Hedge Fund Start-up Firms.
HFMWeek (HFM): Are you seeing a healthy market for new hedge fund launches in the US?
Vinod Paul (VP): 2013 and 2014 were very strong years for start-ups in the US. Our US pipeline is also quite healthy for 2015 in terms of start-ups, which is a little different to Europe, where there aren’t as many launches. In terms of overall US business, 50% of the clients we brought on in 2014 were start-ups; this is up from 40% in 2013. There are several factors that have contributed to this, some that we cannot control, such as how the wider market performs. Institutional money coming back into the market is causing some of the start-up activity. Many of the start-ups we have been able to bring on were funded by larger institutions. HFM: How are today’s start-up funds different than those from five years ago?
It’s officially 2015! With the New Year upon us it is important to set new goals for the future. In today’s post, we offer five resolutions hedge funds should consider to help pave the pathway for another prosperous year.
Resolution #1: Prepare for Cybersecurity
In 2014, hedge funds were revamping their IT policies and upgrading their methods of preventing, detecting and responding to cyber threats. However, this push to overhaul and enhance security was largely reactive to the several breaches we witnessed in 2014. Among those companies affected were Sony, Target, JP Morgan Chase and Home Depot. In 2015, we predict cybersecurity will remain at the forefront of headlines. That being said, hedge funds should prepare ahead of time and have detailed information security policies in place.
Resolution #2: Avoiding Common Cloud Mistakes
When it comes to hedge fund operations and technology, there is no margin for error. Common mistakes range from not sizing bandwidth adequately to business needs to not planning proactively for applications and assuming deep security safeguards are in place. Hedge funds that take the proper precautions and do their research when cloud shopping save themselves from preventable stress and inflated issues down the road.
It’s been quite a year, and as always, it’s hard to believe it’s over. In 2014, Hedge IT continued to thrive in its goal to provide advice and insight into hedge fund technology and operations. The financial services industry is evolving at a rapid pace, and we’re evolving our topics and conversations to keep up. Across 100 blog posts this year (not including this one), almost half of them – 49 to be exact – addressed the topic of security, which is undoubtedly one of the single most important focus areas for hedge funds and investment firms today. In addition to security, we covered everything from tips for starting a hedge fund to avoiding cloud mistakes to hiring for IT roles.
Looking ahead to 2015, we plan to keep the conversations tuned in to what really matters to hedge funds when it comes to technology, and we’ll share as much content as we can in as many formats as we can. But before we get too ahead of ourselves – it’s not quite 2015 yet – let’s take a look back at 10 of our most popular blog posts from 2014.