Last week, we hosted a webinar in which our three experts discussed various factors that managers should keep in mind when starting a hedge fund. During our webcast, Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011, we heard from Sam Stock of Goldman Sachs on the financing aspect of a hedge fund launch, as well as Gus Black of Dechert LLC, who shared insights regarding legal factors involved in the launch process.
Our final speaker, Serge Bukhar of Eze Castle Integration, talked about the technology aspects of a hedge fund launch. The following is an excerpt from his presentation on the topic.
Following are some key technology considerations for funds that are preparing to launch. First, I will talk about the two different paths that hedge funds can take with their technology: hosting their infrastructure on-premise, and utilizing a hosted managed infrastructure via a third party. Then, I will dive into several important technology requirements for hedge funds, including real estate, infrastructure, disaster recovery and business continuity, and archiving.
On-Premise vs. Hosted Infrastructure
An critical decision you'll have to make early on is whether to host your own traditional IT infrastructure (which includes PCs, servers, and other hardware) or use a hosted solution.
Here you can see the differences between these two paths. It is only over the past few years that investment firms have started to see hosted solutions as viable options for their technology. More and more, we are seeing our clients turn to managed services and the cloud to host their infrastructures.
If you don’t already know what the cloud is, it is the option to “host” your technology systems and applications virtually through a third party provider, which leaves you to simply log in to a web-based repository to access your data and applications. Unlike the traditional model, with hosted infrastructures, firms don’t need to build out communications rooms in-house or rely on data centers to store their equipment.
Hosted infrastructures tend to be good fits for small start-up firms, as they are often all-inclusive IT solutions that require minimal up-front capital expenditures.
You can see in the table above that the turnaround time for installation of a hosted service is a little shorter than your traditional on-premise infrastructure, and pricing is typically structured on a per user, per month basis.
Once you’ve decided whether or not to host your technology infrastructure, you’ll need to find an appropriate office space for your firm. Things you should consider include:
The projected capacity of your business’ growth;
The space’s accessibility for your clients; and
The economic expense of carrying a long-term lease on your financial statements. Rent expenses can be significant and vary depending on the location of your desired office.
Here are some options to consider in terms of real estate:
Executive Suite – There are a number of advantages to using an executive office suite or hedge fund hotel. Typically these spaces require shorter leases (about 6-12 months), which can be attractive to hedge fund managers who don’t want to be locked into long financial agreements.
Hedge fund hotels usually offer standardized packages with office equipment, technology and administrative support bundled together. Funds also gain entry into prime real estate areas with this option. However, there can be hidden costs and fees associated with executive suites, so fund managers should be sure to ask questions up front about what costs may or may not be included in the lease.
Sublease – With a sublease, you can get many of the benefits of an executive suite with more flexibility, as you are leasing from an existing business. You’ll have access to shared common areas and administrative support, as well as lower overhead expenses and no installation fees on things such as utilities, phones and Internet services.
Independent Commercial Space – Leasing commercial space gives funds the greatest flexibility, but also requires the greatest commitment. These are typically multi-year leases, so you must be willing to commit. Commercial leases are also the most expensive of your real estate options.
If you have chosen to host your technology equipment on-site, you’ll want to look for a high-speed, highly resilient and secure infrastructure. Security is fundamental when considering the technology setup and network infrastructure of a fund. A multi-tiered security approach is essential to protect the critical information that passes through the system every day.
If you are going to outsource IT, you should verify that your provider is considering the security of your data center/hosting environment. The site should maintain physical security, cages, 24x7 watch, technical security, cameras and digital monitoring. The data center needs to have sufficient redundancy and availability. Managers should also inquire about the frequency of system and application monitoring to ensure that nothing goes wrong with the security in place.
Archiving & Voice Recording
Email and instant message (IM) archiving is essential to complying with the many regulations to which hedge funds are subjected. In the U.S., the Federal Rules of Civil Procedure relating to electronically stored information require hedge funds to be able to supply emails, IMs, Bloomberg Mail and IMs, documents, spreadsheets, and PDFs upon request.
Email and IM data should be saved for the amount of time prescribed by law. Data must be stored in WORM (Write Once, Read Many) format so that nothing can be changed or deleted. Records need to be indexed in searchable files to aid in providing only the information that is requested. The best way to store data is on its own offsite server, accessible via the Internet.
In addition to archiving data, investment firms in the U.K. are also now required to record phone conversations. Last November, the Financial Services Authority (FSA) ruled that firms must record not only fixed line calls, but also calls made from mobile phones. By November 2011, firms will have to demonstrate that they employ technology to record these calls, or alternatively, prove that relevant communications are not currently taking place on company phones.
Disaster Recovery & Business Continuity
In addition to archiving and voice recording, backup and recovery is an essential step to managing a hedge fund, especially in the event of a disaster or outage.
The primary objectives of a business continuity plan (BCP) and disaster recovery (DR) system are to minimize potential financial loss, allow for continued service to clients and partners, and diminish negative effects of disruptions on a firm's strategic plans, operations, market position, and reputation.
Investors are becoming increasingly more stringent in vetting a firm’s business and IT practices. They are expecting firms to have comprehensive and tested plans and procedures in place and requesting to see a firm’s plans and practices during routine pre-investment due diligence audits.
It is important to understand the difference between a business continuity plan and disaster recovery, as they deliver complementary yet unique capabilities to a fund. DR encompass the steps taken to implement and support the infrastructure (hardware, software and sites) necessary to make recovery of mission-critical services and applications (e.g. e-mail, trading, voice, file, accounting, etc.) possible. The steps to access up-to-date information and applications are established with DR.
A BCP plan makes use of the infrastructure addressed in the DR Plan, but focuses on business operations and understanding such items as:
What are the mission-critical processes?
Who are the key personnel?
How are they going to be notified of an emergency?
Where and how will they continue to operate?
An effective BCP/DR solution takes approximately two to three months to develop, and supplies an understanding of what processes and personnel are essential. It also addresses documenting, planning, implementing, testing, and maintaining the policies and procedures to ensure these can continue to operate or quickly return to operations after an unexpected outage.
There are of course, many other issues and solutions needed to start up a hedge fund, but these are the most important, essential strategies for a successful one. Along with the key strategies needed for hedge funds, here are a few other pieces of information to take away from this event.
As you know, uptime is a top priority for hedge funds. Knowing the losses that can occur during a downtime will help you to understand the risks faced and the importance of taking the necessary steps to prevent and protect against downtime. By investing in technology, you’ll also be showing your investors that you are doing what’s necessary to protect their investments and maintain a smart and successful business.
Be sure to plan for future growth. Think ahead, especially when it comes to your technology. If you expect that your firm will be around for many years to come, ensure that your technology decisions reflect that.
Identify your firm’s primary (critical) and secondary applications and business processes. By doing so, technological functions can be optimized while still retaining a cost-efficient budget. One size does not fit all. It is generally best to have security and planning customized to fit the scale of your business in order to obtain the most solid system.
Did you miss our webinar, Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011? Download the webcast today, or visit our Hedge Fund Launch Kit for more information.
*The above information was originally presented by Serge Bukhar during the "Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011" webinar on February 8, 2011.