Hedge Fund Technology for a Start Up Fund

March 9, 2011

Hedge fund technology is an integral part of operations and something that must not be overlooked during the launch process.

It is important that a hedge fund manager define the firm’s needs and then map and budget technology accordingly. One area of caution when it comes to technology is looking for the “perfect” solution, as in most cases it does not exist. Typically the “perfect” solution is a combination of technology components from multiple vendors.

The first step in devising a hedge fund technology blueprint for a new is understanding the required elements. From there, a hedge fund must determine what they want to keep in-house and what can be outsourced. With the advent of cloud computing, a hedge fund can now go with a fully-managed, hosted IT solution that includes all of the infrastructure and business applications to run effectively, or opt for a traditional in-house solution.

Let’s first look at what goes into a hedge fund technology environment and then we’ll dive into what can be outsourced.

Infrastructure & Security

Building a secure and highly resilient infrastructure is critical to ensuring that the fund’s information, as well as that of its clients, is always protected. A hedge fund technology infrastructure should include a multi-tiered approach to security that includes:

  • Maintaining physical security, whether the equipment be hosted in-house or off-site;
  • Incorporating technical security around the infrastructure, including camera and digital monitoring;
  • Ensuring sufficient redundancy in the infrastructure;
  • Maintaining an N+1 infrastructure with multi-entry fiber paths, power grids and multiple network providers; and
  • Monitoring applications 24x7x365 and ensuring alerts are in place to notify the appropriate IT staff if something is not functioning properly.

Communications: Internet &Voice

Let’s look at Internet first. It goes without saying that Internet access is an essential piece of hedge fund technology. There are typically three options for Internet access:

  • Cable modem, which can offer high speed at a relatively low cost, however, the reliability is questionable;
  • DSL, which has the same pros and cons as a cable model; or
  • T1 Line, which delivers high reliability and efficient speeds but at a more expensive price point than cable or DSL.

Wireless broadband is also available in some regions, such as New York City, and provides a good alternative to a T1 line. Many firms have a T1 line for their primary internet and use wireless broadband as a secondary connection for resiliency.

Whichever Internet access method firms select, they should ensure that the offering includes proactive monitoring and security features to ensure the highest possible availability.

Moving on to voice, the most common approach is purchasing a voice switch (or PBX), which is installed in a firm’s data center and provides comprehensive feature sets including options for routing calls, conference bridges and storing voicemails.

As the voice over IP (VoIP) market has matured, hedge funds are increasingly considering hosted voice solutions as well. Hosted or VoIP solutions can be relatively inexpensive and offer key capabilities such as high voice quality, number portability, call forwarding and Microsoft Office integration. There can be features trade-offs, but the cost difference between a traditional in-house voice system and a hosted solution can make the solution advantageous for hedge fund start-ups.

Archiving

The Federal Rules of Civil Procedure require firms to be able to supply electronically stored information upon request, including documents, spreadsheets, PDFs, emails, instant messages (IMs), and Bloomberg mail. The required storage time for email and IMs is currently seven (7) years in the U.S. The rule also specifies that the messages should be stored in WORM (Write Once Read Many) format.

There are a number of message archiving solutions available to firms looking for hedge fund technology. In addition to finding one that meets the above requirements, a hedge fund should seek a solution that provides access via the Internet and an intuitive search feature that allows files to be found quickly and easily.

Data Protection: Backup & Disaster Recovery

Backup and Disaster Recovery are two distinct hedge fund technology solutions that complement each other. At the bare minimum, a hedge fund should backup its critical files and information at least daily to an off-site location. The downside of backup is that the recovery times can be very long and the amount of information lost may be great. For example, if a hedge fund has an outage at 4:00 p.m. and the last backup was from 6:00 p.m. the previous day, the firm has lost an entire day of data, which most investors will not look favorably on. Additionally, recovering from tape assumes that a firm has the necessary machines on which to transfer the data.

Today, most large investors expect hedge funds to have a disaster recovery plan in place. In fact, the SEC typically requests a copy of a firm’s disaster recovery plan as part of its routine examinations. A disaster recovery plan centers on the steps and systems necessary to quickly recover a firm’s mission-critical services and applications (i.e. email, trading, voice, etc).

A few items to keep in mind during the development of a disaster recovery plan include:

  • An effective hedge fund disaster recovery site requires redundant power, HVAC systems, fire suppression systems and diesel generators.
  • A disaster recovery site should be a safe distance from a firm’s primary office location. If the secondary site is too close a firm could end up without access to its critical systems in the event of regional disasters.
  • Tape backup does not equal disaster recovery. A firm’s disaster recovery plan should include the daily electronic replication of essential materials to an off-site location.

About the Author

Mary Beth Hamilton is director of marketing for Eze Castle Integration, a leading provider of IT services, technology and consulting to hedge funds and alternative investment firms. She has 12 years of technology and marketing experience and holds an MBA from Boston College.

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