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Preparing for a Disaster: Is Your Hedge Fund Technology Up to Par?

By Kaleigh Alessandro | Tuesday, October 11th, 2011

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 Integration. Take a look at our recap below. To listen to the full event recording, click here.

Disaster Recovery & Business Continuity Drivers

In today’s environment, hedge funds and alternative investment firms are looking for seamless operational connectivity as a means to attract investors, meet changing regulatory requirements and gain competitive advantages in the marketplace. Particularly since the credit crisis of 2008, firms are placing a stronger emphasis on risk mitigation. It is realistic to assume that there can be significant capital losses associated with downtime, and this fact highlights a greater need for technology systems and processes to mitigate risk and maximize operational efficiencies.

The focus on hedge fund technology has increased dramatically over the past several years, particularly around a hedge fund's disaster recovery and business continuity planning. Some investors, as we heard directly from one of our panelists, are requesting two Due Diligence Questionnaires from firms – one specifically designed for technology systems.

A Recent Reminder: Hurricane IreneDisaster Preparedness for Hedge Funds

2011’s Hurricane Irene, which struck the East Coast of the United States back in August, was a reminder to all hedge funds and investment firms to prepare for anything. Firms like Ridgefield Capital were left with no power after Irene touched down on a Sunday, and, therefore, opted to move trading operations to their disaster recovery (DR) site Monday morning. Non-traders were able to get remote access via Citrix and work from their homes. Luckily, the firm had undergone a recent DR test, and employees were well-briefed on the proper processes for such a situation.

For firms who may not have undergone recent testing, however, circumstances could have been different (Read our DR testing FAQ). Even scarier, what about firms without DR in place?

Defining your Disaster Recovery Objectives

The first step in finding the right type of DR for your fund is identifying your mission-critical systems and applications. With this knowledge, you can easily calculate your firm’s Recovery Point Objective (RPO) and Recovery Time Objective (RTO) – which will help you determine the frequency of backups you require and the least amount of downtime your firm can endure. Read more about RPO and RTO here.

Once your firm’s RPO and RTO are defined, be sure to use an infrastructure checklist as you engage with DR providers. Look for physical and virtual security processes, significant power and cooling resources, and N+1 redundancy to prevent single points of failure.

How does Business Continuity Planning fit in?

In addition to a sound DR system, hedge funds and investment firms should also maintain comprehensive business continuity plans (BCP). BCP extends beyond technology to focus on the critical operations and processes that firms must have available if a disruption occurs. Once a plan is in place, firms must properly communicate that plan to employees to ensure its effectiveness. Here are a few suggestions:

DR Guidebook for Hedge Funds

  1. Identify a predetermined rally point for employees to meet in the event of an unexpected disruption. A great way to make sure employees remember this location as well as other important information, such as phone numbers, is via a wallet card.
  2. Identify and outline all essential employee processes and procedures in writing. Who is responsible for what tasks? Be sure to give someone the task of notifying third parties including prime brokers, fund administrators and trading counterparties.
  3. Create a calling tree to ensure communication remains fluid and all personnel is promptly notified of the situation.
  4. Utilize table top exercises on a regular basis to practice BCP scenarios.

Final Thoughts

Times have changed. Technology is no longer an afterthought, but an essential part of the investor due diligence process and a key differentiator for firms looking for capital allocations. Disaster recovery and business continuity solutions are prerequisites for hedge funds in today’s industry and should be frequently tested and updated to ensure they are remain aligned with changing businesses.

Quiz: How often should a disaster recovery (DR) solution be tested?


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Photo Credit: Wordle

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