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Hedge Fund Technology for Startups: Mistakes to Avoid and Guidance for Success

By Zorela Georgescu | Thursday, April 28th, 2016

The financial services industry is currently under tremendous pressure to meet both investor and due diligence requirements. Thus, it is increasingly important to maximize technology to meet these pressures. To conclude our six-part hedge fund launch webinar series, we spoke with Eze Castle Integration’s own managing director Vinod Paul, who shared insights about current IT challenges and demands and how today’s hedge funds can employ best practices for operational excellence.

Key Priorities for New Managers

Paul defined cybersecurity and scalability as two primary technology considerations for new managers. You must first understand your firm’s specific vulnerabilities and exposures. One of the most common mistakes new launches make, according to Paul, is assuming that they only require the basic bare minimum in terms of technology. He urges new managers to pick an IT solution with operational growth in mind -- considering the business not at the onset, but in three to five years.

Service Provider Selection Criteria

Paul continued to place emphasis on customized IT, stating that when it comes to outsourcing, it is imperative that a firm carries out proper due diligence in choosing a provider to meet the firm’s unique needs. “You want enter into a true partnership that offers open lines of communication, flexibility, and ultimately, trust and accountability,” he said. Brand and reputation, long lasting relationships with clients, and industry experience are some of criteria Paul feels are most important when selecting a service provider. “Don’t step in to it with the attitude that a current provider is good enough, for right now,” he cautioned. The service provider should not only address day-to-day operations but also anticipate potential problems down the road.

Much of the cloud’s popularity – every new startup on-boarded by Eze Castle since 2014 has selected a private cloud platform – can be attributed to the rapid connectivity that it allows. Five to 10 years ago, there was a much longer consideration period. Then, hedge fund firms were traditionally building very expensive Comm. rooms that required several weeks of construction. Now, with the advent of the cloud, firms can reap the benefits much sooner. To refresh your memory, the traditional benefits of the private cloud include:

  • Fully managed and all-inclusive solutions

  • Transition from CapEx to OpEx, offering firms increased visibility and predictability around IT budgeting

  • Reliability: with the right connectivity in place, it is robust and high-performing

  • Secure, extremely redundant, and flexible

Growing Cyber Expectations

In addressing the SEC’s increasing cyber expectations, Paul noted the importance of having a Written Information Security Plan (WISP) in place. Enacting and employing policies to mitigate security risk is critical, but documenting those policies is equally as important -- not only to meet the demands of the SEC, but to demonstrate to clients and investors that your firm takes cybersecurity preparedness seriously. The goal of a WISP, Paul continued, is to protect the confidentiality, integrity, and availability of critical information, information assets and sensitive materials for your firm and those of your clients. He reminded us that WISP cannot be a onetime effort.  It must be continually audited, refined, and updated to respect changes to your business and investors’ businesses, ensuring consistency with business practices and the ever-changing cyber security landscape.

In addition to WISP development and implementing additional policies (Access Control, Personal Information Security, Incident Response, etc.), and, of course, employing layers of security across infrastructure, employee awareness and training is the last critical piece of the puzzle. Policies can be documented, Paul explained, but if employees are not trained to identify and mitigate cyber risks, the policies will be ineffective in protecting a firm. “Employees can be your biggest weakness or first line of defense.” He recommended encouraging annual information security training to educate employees on risks impacting them and the marketplace, what to avoid in terms of phishing schemes, malware, etc.

Mistakes to Avoid

Paul concluded by describing the five most common mistakes new launches make during the start-up phase, and how to avoid them.

  1. You want the perfect “all-in-one” solution. In reality, a successful approach means negotiating, purchasing and deploying multiple systems from multiple service providers.

  2. You are so focused on today, you are not factoring in future growth beyond your launch. Before you commit to any tech solutions, envision how your fund will look in the long term.

  3. You haven’t fully considered the multiple roles technology plays in your current work environment. Consider the work you’re doing as an employee, and consider which systems supported that work.

  4. You believe you can manage a new hedge fund and technology needs on your own. Acknowledge that you will require IT systems to build servers, manage networks, and handle day-to-day needs.

  5. You relinquish complete control to third parties. Don’t forget about managing providers. Trust, but verify.

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