Hedge Fund Technology Moves to the Clouds

March 30, 2011

Cloud computing is attracting a lot of attention these days based on the operational, efficiency and cost-saving benefits these services can provide.  Rather than purchasing costly equipment, cloud services allowing fund managers to outsource hedge fund technology infrastructure or applications to a third-party who manages and maintains everything.  Cloud services also allow firms to only pay for the resources they require and easily expand on-demand.

There are three primary types of services being delivered via the cloud:

  1. Software as a Service (SaaS), where customers securely share all or part of an application but do not control the underlying platform or infrastructure.  More and more traditional software vendors are creating cloud-based versions of their applications to meet growing customer demand.
  2. Infrastructure as a Service (IaaS), where customers outsource the underlying physical infrastructure including processing power, networking components, hardware and storage from a third-party service provider.  Increasingly hedge fund service providers are bundling business applications with IaaS to provide a complete IT solution.
  3. Platform as a Service (PaaS), which is primarily used by developers to code, test and experiment with new software developments.

Beyond the types of cloud services available, it is important to understand the underlying cloud environment that is delivering the services.  With cloud computing, large pools of resources are connected via private or public networks.  The three most common cloud architectures are: Public, Private and Hybrid clouds.  Each has pros and cons, so it is important to understand the difference when evaluating your technology needs.

Public clouds are owned and operated by third-party service providers.  Infrastructure costs are spread across all users so customers benefit from economies of scale that translate into a lower-cost, pay-as-you-go model.  Another advantage of public cloud infrastructures is that they typically can provide clients with seamless, on-demand scalability.

Private clouds are those that are built exclusively for an individual enterprise. They allow the firm to host applications and share services across business units, while keeping control in-house and ensuring high security levels.  Private clouds, however, still require a firm to purchase and maintain all the hardware and software in-house.  This option is generally more applicable to large firms that have an internal IT department.

Hybrid Clouds combine the advantages of both the public and private cloud models. In a hybrid cloud, a company can leverage third-party cloud providers in either a full or partial manner. This increases the flexibility of computing. The hybrid cloud environment is also capable of providing on-demand, externally-provisioned scalability. Augmenting a traditional private cloud with the resources of a public cloud can be used to manage any unexpected surges in workload.

Considerations

Now that we have explored the types of clouds and the services delivered, let’s look at some key considerations for a move to the cloud.  Security in the cloud is typically a concern that is top-of-mind, however, in actuality, cloud services can provide security on par with traditional in-house infrastructures if they are architected and maintained correctly.  The industry best practice is for cloud providers to use a multi-tenant architecture that keeps client information in independent, secure silos and prevents co-mingling.

The number of cloud service providers continues to grow exponentially with many focused on providing services at the lowest cost possible.  While cost should certainly be a consideration when selecting a service, a hedge fund must also ensure that the provider understands its business, can guarantee a high level of service and performance, and will be responsive should an issue occur.  If a firm has infrastructure issues or experiences an outage during market hours they need to be confident that the service provider will be reachable, address the issue quickly, and implement safeguards to prevent re-occurrence.

Another consideration hinges on a firm’s growth plans.  While cloud services offer flexible monthly subscription models, firms must take a long-term view of their growth plans to appropriately plan for future costs and hedge fund technology requirements.  Many hedge fund-specific clouds are designed to grow with a firm, but that is not necessarily the case for generic, mass-market cloud providers.  For example, a firm should consider future application purchases, such as an Investor Relationship Management system or Order Management System, and ensure that the cloud provider can support and integrate these systems in the cloud environment.

Finally, a firm must inquire about the kind of best practices the service provider is employing particularly around data protection, retention, and security.  Business continuity planning and disaster recovery are becoming near‐requisites for most investors. Mass‐marketed cloud services typically do not include these levels of data protection so a customer would have to work with two separate third‐parties to accommodate this desired outcome.  That said, most hedge fund-specific cloud services do incorporate data resiliency and protection into their bundles.

Questions to Ask Cloud Service Providers

Here are some questions to consider when evaluating a potential provider.

  • How many clients are deployed in your cloud environment?
  • What applications are you certified to support?
  • How do you ensure resources are always available for clients?
  • What are your backup and retention procedures? How long is data retained?
  • What is your disaster recovery strategy and how frequently is it tested?
  • What security standards are used to ensure data and application integrity?
  • Is data encrypted at rest as well as in transit?
  • How are support requests handled, and what is the expected response time?
  • Have you ever experienced a security breach? If so, how was it resolved and what safeguards were implemented to prevent a repeat experience?
  • For a hosted application, are there any limitations or performance changes when deployed in the cloud?

Cloud services are an attractive technology option that should not be overlooked by the hedge fund market, but education is the key to selecting the right service provider.

About the Author

Mary Beth Hamilton is director of marketing for Eze Castle Integration, a leading provider of IT and cloud computing 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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