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Colocation for Hedge Funds: The Pros and Cons

By Kaleigh Brousseau | Tuesday, August 31st, 2010

In a world where power is the ultimate requisite and security is an utmost concern for hardware and applications, hedge funds and investment firms are often turning to colocation services for support. More and more, hedge funds are relying on data centers to host their hardware and/or software in an off-site facility which provides necessary bandwidth and increased protection. But like each important decision a firm makes, the choice to host equipment at a colocation center is one that requires certain considerations first. Let’s take a look at why funds use colocation services, the pros and cons of doing so, and the considerations for choosing a data center.

Why Hedge Funds Are Using Colocation Services

There are a number of driving factors that motivate hedge funds to rely on colocation services for storage and support.

  1. In-house facility limitations. As small or medium funds begin to grow, so does their supporting technology. If the technology grows at a rate faster than the hedge fund can accommodate, they often decide to host their equipment off-site. Communication Rooms (Comm. rooms) can be difficult as well as expensive to expand. Based on a firm’s size, a certain level of power is needed, and it can often be hard to generate on-site. Firms must also take into consideration their ability to control heat and humidity levels, which can seriously affect the performance of most hardware.

  2. Redundancy. As with general size and space limitations, an on-site facility might not be able to accommodate the levels of redundancy that a firm requires to operate sufficiently. Also, disaster recovery and business continuity planning are being sought out more by businesses who understand that, realistically, they need to prepare for a potential outage. Colocation can be the solution, as equipment is stored away from the production environment at locations built, from the ground up, with multiple levels of redundancy, lessening the likelihood of failure. Depending on its tier (I, II, III or IV), a data center can provide varying levels of uptime.

  3. Flexibility. If a firm that is launching or relocating attempts to store equipment in-house and the accommodations are not right, they will ultimately shorten the lifespan on the hardware, and end up costing themselves more money. There is never a cause for concern over space at a data center; you simply rent out the space you need, and if your equipment expands or increases, you rent more. You are paying for what you are getting without having to worry about spending thousands of dollars expanding your own comm. room.

The Colocation Pros

There are a number of advantages to hosting your firm’s hardware and/or software in an off-site colocation center. For instance, a data center offers immense flexibility, giving firms exactly the space they need at a lower cost than it would require to build out an on-site Comm. room. Colocation also offers a vast amount of necessary redundancy that firms can rarely generate on their own. Two of the most important considerations for choosing a data center are power and bandwidth; luckily, data centers are built precisely around these two factors and, therefore, are built around a hedge fund’s needs.

Security can also be a significant advantage when it comes to colocation. Data centers are secured and manned – most 24x7x365. Data centers often provide surveillance and monitoring – services that firms can potentially get on their own, but most likely at a higher cost. At a data center, security comes with the package. Additionally, construction and moving operations are never a concern. Building or expanding a Comm. room will most likely take weeks, whereas a data center can probably offer additional storage space in hours. And if a fund ever needs to move operations to a new production environment, there is no need to worry about transporting hardware.

The Colocation Cons

While there are specific advantages to colocation, there are also a number of disadvantages. For example, it is not always easy for a fund to find a data center near their operations. If they are not located in a major metropolitan area, it could be challenging to find a nearby data center. Even if proximity is not an issue, there can still be challenges. For example, if a server needs to be rebooted, it’s not quite as simple as a stroll down the hall. Someone will have to travel to wherever the hardware is stored. In the financial services industry, particularly, where time equals money, it is vital that location be factored into all considerations so as to optimize uptime.

Another disadvantage to colocation is the participation of third parties. When third parties are involved in any process, it is often disconcerting. If you are not the one handling and managing your equipment, there is always a chance that things will not turn out as well or as efficiently as you want. There are always the “what-ifs” to consider, and sometimes, there are too many to ignore.

Considerations for Colocation

Colocation is a growing trend in the hedge fund industry, particularly with its advantages in terms of increased redundancy and security. However, at least one important hurdle needs to be overcome before more firms can rely on colocation for their hosting needs. Machines and systems are made more power-hungry than ever before; computers and other vital business equipment are designed to require more of every resource. Data centers must be prepared to handle such increases.

If you choose to host your firm’s hardware in a data center, there are two important factors to consider: redundancy and application compatibility. First, you must understand the necessary bandwidth you will need to process information from your work and production environment to your data center. If you don’t have enough bandwidth, latency will quickly become an issue. The data center you choose must be able to install redundant connections.

Secondly, be sure that the functions of your current applications, as well as those of any future applications you may be interested in, are compatible with running it out of a colocation center. Remember that every 60 miles away you are from your data center equals 1 millisecond of response time for your applications!


Colocation services are a viable option for many hedge funds and investment firms; they provide increased power and redundancy, security and flexibility. Data centers are even trying to “go green” these days, providing even further opportunities for firms to get the needed amount of power by using fewer resources. However there are a number of considerations to be heard before making a move to host your technology elsewhere.

For more information on Eze Castle’s colocation services, please contact us.

Also, be sure to check out these related articles and subscribe to Hedge IT so you don’t miss future posts!

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