01/02/2012 Author: Will Wainewright

Cloud control

As an increasing number of hedge funds make the switch to cloud computing, HFMWeek explores the technology’s potential benefits and costs

Cloud computing’s sales pitch seems too good to be true. IT systems that are more efficient, less cumbersome and far easier to upgrade – and all for less than firms are probably presently paying. Therefore, it is no surprise that many more hedge funds have made the switch during the past year, especially given the technological demands of much of the industry. But it is still a poorly understood area to many, with concern existing among its detractors over security, disaster recovery and other issues.

What is the cloud?
The cloud, for all the marketing hyperbole that has surrounded its development, is ultimately a way of describing a form of IT outsourcing. Placing IT systems “on the cloud” means applications and data can be accessed over the internet, purportedly in a completely secure way. Whereas before, hedge funds would have operated using an onsite server, probably located somewhere in the office, they can now work from bigger and much more powerful servers located off-site.

As a result, so goes the sales-pitch, business can be conducted from anywhere with an internet connection, through a computer or tablet, or even via some smartphones, much more easily, quickly and powerfully than before. This was a key reason for near-$1bn investment firm Stratton Street deciding to move to the cloud (see box-out).

There are different ways funds can switch, and doing so doesn’t mean they have to move all their IT functionality to the technology. In terms of services offered, they can choose the infrastructure approach, where the vendor provides infrastructure and charges based on consumption; the platform, where the vendor provides and manages the operating system; or just software, where applications are run on the cloud.

Cost-savings
And all those advantages come, in theory, at a saving. Rather than paying for new applications, server space or other forms of IT functionality, space and software are rented on the cloud for a monthly or annual fee. One multi-billion-dollar London hedge fund revealed to HFMWeek that it was making monthly savings of around £30,000 ($47,127) as a result of moving to the cloud. Another advantage is that software and technology is upgraded and repaired ‘on the cloud’, which means there is no need to bring in IT specialists to work on computers and servers on-site.

Risks
If it sounds too good to be true, critics would say that’s because it is. Rahul Moodgal, an independent advisor in investor relations and business development, says there is a lot of scepticism in the industry over the technology’s security and disaster recovery capability. “A lot of funds are not giving it a chance,” he says. Part of the concern is psychological, especially in terms of investors wanting to view systems first hand when performing due diligence. “Any investor clients I work with want to go into your office and see a system in place they can touch. It makes it more tangible.”

Added to the psychological worry some feel over remoteness, there is concern about the safety of running a business’s IT hundreds of miles from your office. “If I am based in London but my server is in California or Bermuda the data laws may be different,” says Moodgal. “How do I know that the data I store and work I do on the cloud is going to be safe and not seen by prying eyes? What happens if you want to move from the cloud; will you get your data back? These are the sorts of questions investors will be asking.”

In terms of security and possible susceptibility to cyber attacks – another concern people have with the cloud – providers argue that there is equal risk in all sorts of online services people use routinely on a day-to-day basis.

“These are always concerns about security when you talk about the cloud,” says one cloud vendor. “But people doubting the security aspect pay their bills online without a second thought.” Other concerns centre on how regularly data is backed up and, indeed, what happens if a provider goes bust. “These questions have not yet been adequately answered by the cloud industry,” says Moodgal. “Until they do, it is difficult to see most of the hedge fund industry moving over,” he notes. 

Industry take-up
Judging by the way service providers have aggressively targeted the hedge fund industry for cloud business, it would seem they, at least, believe the scope is there for widespread take-up of the technology. Commensus, Eze Castle Integration and Capital Support, three established names, lead the growing field of providers, each offering tailored solutions wherein funds can select how much of their existing IT they want to convert to the cloud.

At present, it is difficult to accurately assess what proportion of the hedge fund industry has made the move to the cloud, although anecdotal evidence suggests it is more than a small minority. Speaking to HFMWeek in December, Eze Castle said nearly all of the 44 launches the company worked with last year adopted the technology, while five clients worth more than $5bn made the switch towards the end of the year. 

“In our experience, cloud technology is being heavily embraced by start-up hedge funds at the moment, who are attracted by the cost-effectiveness and ease of installation,” said Eze Castle managing director Vinod Paul.

Admin firms are getting in on the act too, with San Francisco-based Conifer Fund Services the first to offer a cloud-based product. “The big driver for hedge funds has been the technology’s ability to deliver greater transparency across the portfolio,” Jack McDonald, president and CEO, told HFMWeek.

However, despite the long-term cost-savings and efficiency gains on offer, current cost pressures facing many hedge funds could mean they are not in a position to take the short-term hit. “The industry is not awash with money following last year’s poor performance and potential pressure from investors,” said one provider. “This is far down the priority list for many funds we speak to.”

It seems take-up is more heavily skewed proportionally in favour of start-up funds, for whom it is cheaper than building new old-style systems. Their success, or otherwise, in using the technology will be instructive and ultimately determine the extent of the cloud’s take-up by the wider industry.