On our recent Emerging Manager Trends in Operational Due Diligence webinar, we looked at how today’s emerging managers face a number of challenges from fierce competition to the rapidly evolving investor IT due diligence process, especially in terms of scrutiny on technology processes and security safeguards.
The reality is that investors have a greater understanding of technology, are asking more probing due diligence questions and care about the responses they receive. In recent years the depth of DDQ questions around information technology and security has expanded as investors become increasingly savvy about IT and headlines around IT risks have grown.
Here at Eze Castle Integration we regularly assist our clients in completing the IT portions of investor due diligence questionnaires. The wording of questions varies but here is a handy list of 51 common IT due diligence questions we see.
- Provide an organization chart for the Company, its affiliates and key personnel.
- Provide the physical address and general contact information for each of the Company’s office locations.
- Provide the name and contact information of the Company employee(s) assigned to the client’s account(s).
- Provide a list of compliance personnel, their roles and qualifications, the date of his/her appointment and position within the Company’s organizational structure.
There has been discussion for years about whether public or private cloud platforms were more suitable to financial and investment management firms. And that debate continues, but with the addition of a new player – the hybrid cloud.
While the public cloud receives praise for its flexibility and potential cost savings and the private cloud for its robust security and reliable performance, the hybrid iteration essentially marries these features to create a compelling package for firms who don’t fit naturally into the previous two categories.
As its applicability continues to surge, it is worth understanding the concepts and benefits behind the hybrid cloud. Let’s take a look at what makes hybrid environments appealing to some organizations:
Agility & Flexibility: A hybrid cloud model allows a company to combine public cloud assets with those in a private cloud to increase agility and availability. For example, combine Microsoft Exchange and file services via the public cloud with robust security layers and 24x7x365 managed support via the private cloud, and suddenly you’re benefiting from the best of both worlds (hint: we’re talking about the Eze Hybrid Cloud).
During a recent webinar on operational due diligence, we explored the changing ODD environment for emerging managers, and our guest speaker, Frank Napolitani of EisnerAmper, helped shed light on some critical missteps that could cause ODD teams to veto an investment.
>> Click here to listen to our full conversation with Frank and hear more about operational due diligence trends
At the highest level, investor due diligence experts see the following as the most egregious red flags:
Dishonesty: Demonstrated in the form of failing to disclose or withholding information. This shows a lack of integrity.
Belligerence: When managers exhibit an ‘I’m never wrong’ attitude and are unwilling to listen to objective advice.
Incompetence: When a firm or manager’s skillset doesn’t align with the expertise required for a particular function.
More specifically, there are a number of red flags that can give investors pause and lead to either increased due diligence or an outright rejection. From a recent Deutsche Bank survey, keep reading for a few reasons:
Categorized under: Operational Due Diligence Cloud Computing Security Outsourcing Launching A Hedge Fund Private Equity Disaster Recovery Hedge Fund Operations Infrastructure Business Continuity Planning Trends We're Seeing
We all make mistakes, but when it comes to technology and investment operations, mistakes aren’t an option. So let’s look at seven common cloud mistakes we see financial and investment management firms make and talk about how to avoid them.
Mistake #1: Not Sizing Bandwidth to Business Needs
Determining the right amount of bandwidth comes down to the types of services being delivered and user expectations. Nothing ruins a cloud or really any computing experience like sluggish application and Internet performance.
Beyond bandwidth, firms must also consider latency. While latency issues don’t impact all applications (i.e. email is relatively insensitive) for others it is a killer. Latency has little place in trading applications or voice over IP services. When moving to the cloud, have a realistic conversation with the hedge fund cloud provider about the amount of bandwidth your firm really needs.
Mistake #2: Not Planning for Applications
Not all cloud platforms are equal especially when it comes to supporting hedge fund specific applications such as Order Management Systems or Portfolio Accounting Systems. While a hedge fund may not launch day one with one of these applications, there is a good chance they will require one in the future. To help mitigate future growing pains a hedge fund should plan for the future when evaluating cloud providers. Being shortsighted can result in future disruptions and integration pains.
In Part 1 of our hybrid cloud whitepaper excerpt, we reviewed the primary benefits to public, private & hybrid cloud infrastructures, and reviewed a number of considerations including service & support, availability and uptime, and proximity. In Part 2 below, we dive into additional factors to contemplate, specifically: security, application hosting and cost. Remember, to download the full whitepaper, Is Hybrid Cloud Right For Your Firm?, click here.
While your public cloud provider may provide world-class security for its services, your company is still on the hook for certifying all aspects of information security. For compliance-driven businesses, there are still countless vulnerabilities and exposures that public clouds often fail to address. Advancing security features such as multi-factor authentication, targeted attack protection and managed phishing simulations are gaining traction among private/hybrid cloud users who benefit from their providers’ extensive managed security services.
Multi-factor authentication requires at least two authenticating factors to log into a system or network (e.g. strong passwords, security tokens, fingerprint scanning) and can add an additional layer of security for users across email, applications, etc.
Since email often serves as a gateway for hackers to surreptitiously penetrate networks, it’s become essential for firms to employ targeted protection tools and advanced email precautions to ward off these threats. That’s one of the many advantages a private cloud provider can bring to a firm. For example, next-generation security technology can protect private cloud users from attacks delivered through email, social media and mobile applications, prevent advanced attacks, and minimize compliance risks.
Categorized under: Cloud Computing Security Operational Due Diligence Outsourcing Launching A Hedge Fund Private Equity Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Trends We're Seeing
Below is an excerpt from our whitepaper, Is Hybrid Cloud Right For Your Firm?. If video is more your style, scroll to the bottom and watch our 30-minute webcast on hybrid cloud considerations for financial and investment firms.
With its security, privacy, and performance, the private cloud has been the go-to option for financial and investment firms that require enterprise-caliber IT infrastructure. In most cases, that private cloud is professionally managed by a service provider solely focused on monitoring, managing, and maintaining that infrastructure to meet business requirements and compliance directives. Thus, firms benefit from seasoned, industry-experienced professionals who live and breathe financial IT.
For many firms, so-called public cloud infrastructures offer compelling opportunities and advantages. For many smaller and younger firms in particular, the flexibility and ease of deployment are persuasive drivers. What’s more, the initial costs appear to be lower for certain feature sets (although an analysis of the total cost of ownership indicates that advantage is less clear-cut).
Hybrid Cloud: Bringing Them Together
Fortunately, investment firms needn’t take an “either/or” approach to their IT infrastructures. With a hybrid cloud approach that combines many of the most compelling features of public and private clouds, firms can leverage a uniquely flexible platform that meets a broad range of needs.
Which Cloud Has the Edge?
The decision regarding your IT infrastructure has significant implications on the ability of your investment firm to gain and maintain a competitive advantage. As you weigh your options – public, private or hybrid – it can be beneficial to consider the following aspects of cloud architectures and weigh their importance as unique to your individual firm.
In this interview, Eze Castle's Chief Strategy Officer, Mark Coriaty, discusses the emergence of the hybrid cloud and why some financial and investment firms are taking a closer look. NOTE: This article first appeared on Hedgeweek and Private Equity Wire.
Talk about the advancement and evolution of cloud services in recent years and how we’ve ended up where we are.
MC: If you step back and look at the landscape over the last four or five years, we have seen a lot of changes both on the technology front, as well as within the financial markets. Whether the result of fund raising challenges or increasing regulatory demands, the landscape for alternative fund managers has changed significantly.
We’ve therefore had to adapt to the market and this includes three different components: service, technology, and networking/security. With all the different regulatory bodies and demands from standards boards and governments, we needed to make sure we were providing a solution to our clients that a) met those requirements and b) was up to par with the security measures that we pride ourselves on at Eze Castle.
When you look at the Eze Private Cloud, it is a very controlled environment. It features a number of components related to private networking, client controls, data integrity controls, as well as enterprise-standard security measures. But as the public cloud has started to become more popular and mature in recent years, firms have started to pay closer attention to it.
Typically, this is because the cost structure is scalable. If you look at major providers like Amazon, Microsoft and Google, they have enough scale in their infrastructure such that it becomes less expensive for the customer to use the public cloud. However, when you analyse what they deliver versus the requirements of a lot of investment firms, oftentimes those requirements supersede what these large public cloud providers can offer.
Hence the hybrid cloud.
I love a good Throwback Thursday, and for today's post, I want to throw it back to five years ago this month. It was April 2012, and we were hosting one of our biggest and most ambitious events: a Hedge Fund Cloud Summit. At the time, cloud computing was widely discussed and adoption was certainly growing, but there were still a number of lingering questions heard across the industry with regards to financial and business impacts of the cloud, effects on in-house IT staffs and, of course, security.
We still answer many questions related to these topics today, so I thought it might be fun to take a look back at the four panel topics we addressed back in the 2012 event and examine how much the conversation has really changed - or in some cases, how perhaps it's stayed the same.
Making the Business (and Financial) Case for the Cloud
For hedge fund COOs and CFOs, the business impact of a move to the cloud is still a critical consideration for established firms. But many of the myths and common questions that were prevalent back in 2012 are now pretty easy to explain. How do investors feel about the cloud? In 2017, investors are generally comfortable with the cloud if not in favor of it over legacy, on-premise IT infrastructure setups. Is the cloud really more cost-effective? This question was a long-standing 'myth' that's been debunked; for some firms, yes, costs may be lower depending on their previous infrastructure and personnel situation, but for all, the predictability of cost is what has become a primary driver for cloud adopters.
I just finished Season 1 of Showtime’s ‘Billions’ and can’t resist calling out the horrible IT security on a key character’s laptop. ‘Billions’ centers on a multi-billion dollar CT hedge fund and federal prosecutors looking to take them down for financial crimes. [Spoiler Alert] As season 1 nears an end, US Attorney Chuck Rhoades easily logs into the laptop of his wife, who is also the hedge fund’s in-house psychiatrist. On the laptop he finds the incriminating evidence necessary to potentially take down Mr. Billions (aka Bobby "Axe" Axelrod).
From an IT security perspective, there were so many things wrong with this scene, but I’ll highlight three that any hedge fund, regardless of AUM, should consider:
First up: password security.
In ‘Billions’ they broke the golden rule of NEVER sharing your password, but beyond that, multi-factor authentication should have been implemented. Multi-factor authentication is established by requiring at least two authentication factors that are knowledge based (password), possession based (something you have – token, mobile phone) and/or inherence based (something you are – fingerprint or eye scan).
Eze Castle Integration’s Eze Managed Suite offering includes two-factor authentication via a tool called Duo. Duo combines knowledge based (password) with possession based (smartphone) authentication factors.
Hedge fund outsourcing is not a new trend, as buy-side firms have long dispersed the responsibility of many functions to third-party service providers more adept and accomplished at said functions. Technology, for example, is an area where many firms choose to leverage outsourced providers to manage complete or partial infrastructures, support projects or supplement on-site IT staffs. The benefits to outsourcing are numerous, but the true measure of a successful service provider relationship comes when an investment firm’s level of risk in using that provider is low.
Risks are everywhere, particularly in today’s cyber-focused environment. But the risk a hedge fund undertakes when outsourcing a function of its business to a third-party is enormous. Not only is the firm relinquishing control to an outside company, it also takes on the added burden of managing that company, in addition to its own.
It’s one thing to put faith in your service providers to do their jobs effectively. It’s another to ignore your own firm’s responsibility to manage that third party as a means of protecting your own firm. Successfully managing risk associated with third-party service provider relationships is a full-time job, especially for financial services firms working with dozens of various parties. Here are a few tips to help your firm properly manage third-party service provider risk: