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What's Driving Hedge Funds to the Cloud?

By Kaleigh Brousseau | Tuesday, August 16th, 2011

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.

Years ago, hedge funds and investment firms had to spend a lot of capital building their own infrastructure. Post 2008 economic crisis, however, there is wide-scale acceptance of the cloud, even from investors. Accordingly, the quality of cloud offerings by service providers has increased to meet the growing demand. Additionally, both investors and new regulations are driving the need for robust and redundant disaster recovery and business continuity plans, which are easily deployable via the cloud.

Staffing is also a consideration for firms thinking about moving to the cloud. Especially for smaller startup funds who have limited means, the reality of hiring and training an internal IT staff is often impossible. Expertise in-house can be hard to find as well as costly.

Speaking of cost, it is also a significant driver in the move to the cloud. Again, for startup funds in particular who have limited capital to devote to technology, the cloud offers an alternative that requires minimal to no upfront capital expenditures on day one.

Technology Drivers

In the past, hedge fund technology literally meant having an IT footprint and personnel in-house. Funds often had limited space and limited power/heating/cooling resources, primarily due to expensive real estate costs. With technology on a refresh cycle of about three years, also, on-premise hardware costs continued to elevate.

In the last five years, however, there has been a major shift in the industry to new and evolving technologies. This transition can be attributed to three primary factors:

  1. Cost: Virtualization and storage technology has evolved and can now be deployed at much lower costs. Private cloud solutions are based at redundant data centers, and the cost of dedicated connectivity to these facilities has also decreased.

  2. Risks: The investor due diligence process is more extensive than ever, and investors want to understand the risks that come with managing your own technology infrastructure in-house.

  3. Redundancy: Hedge funds (and their investors) want to see that their data exists in an environment that has physical redundancies, including multiple power grids, cooling units, access to many lines of connectivity, as well as an easy path to switch to disaster recovery. One of the greatest benefits to cloud computing is that with the right provider, a hedge fund can have their data and applications reside in a redundant environment and easily deploy their disaster recovery at another physical location in the event of a disruption.

How to Determine if the Cloud is Right for Your Firm

There are a host of factors that go into determining if cloud computing is the right technology solution for your investment firm. Look for the following 5 characteristics when evaluating the cloud:

  • Dedicated vs. Shared Resources: You want to ensure that your data and applications are isolated from those of other firms.

  • Disaster Recovery: Having an easily deployable DR system as part of a cloud services package is a must-have, particularly as the investor due diligence process heats up and new regulations go into effect.

  • Ownership: Ensure your cloud services provider owns their own equipment and is not outsourcing key functions, such as email.

  • Security: Ask about what type of security and monitoring practices (physical and electronic) are in place at your provider’s data center(s).

  • Service Level Agreements: You want your cloud infrastructure to be backed by a comprehensive SLA that ensures top performance and uptime.

Selecting the Right Cloud Services Provider

The factor that may ultimately be your most important during the evaluation process is finding the right service provider. It is essential that you feel comfortable and secure with whichever service provider you choose to utilize. Before you even get to evaluating their technical abilities, look at the following:

  • Does the provider have an established client base?

  • How many years have they been in business? Do they have sound financials?

  • Do they have a global footprint to support multiple office locations?

From a technical perspective, also ensure that your provider had a 24x7x365 Help Desk as well as monitoring capabilities to keep your data and applications secure at all hours of the day and night.

If you would like to learn more about cloud services, check out our resources:

Contact an Eze Castle Representative


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