Hedge Funds Using Cloud Computing

Standfirst: HFMWeek talks to two industry experts about the opportunities and key considerations for hedge funds using cloud computing.


Pat Mullevey heads Systems Integration and Technical Support at Gravitas, a leading provider of IT, risk and research for the alternative investment industry. Pat was formerly, senior systems engineer at GoldenTree Asset Management, where he implemented GoldenTree’s private cloud, and information systems manager with the US Marine Corps.

Sam Wheeler is responsible for the analysis and reporting of Signet’s portfolios and underlying positions on behalf of investors. Previously, Sam was a quantitative analyst at Signet (2007-2011) involved in the development of proprietary tools for the quantitative analysis of underlying managers.

HFMWEEK (HFM): How does a cloud computing service benefit a hedge fund? how do you define the cloud and can it save funds money?PAT MULLEVEY (PM): Today’s hedge funds face massive pressures on IT costs, growing user expectations for agility, user-friendliness, compliance and innovation. Cloud computing is radically changing the way funds think about meeting these needs in a cost-effective, flexible and scalable manner. In terms of cost, cloud computing delivers IT infrastructure and applications as a flexible, on-demand service as opposed to a fixed capital cost, and has dramatically reduced time-to-market for new funds. Funds can now manage IT infrastructure as part of its operational expense as opposed to fixed capital expenditure. This alleviates the need to commit to huge sums of capital upfront towards costly infrastructure footprints that require constant upgrading and maintenance. Cloud also allows funds to leverage market-leading technologies and only be charged for what resources are needed and consumed. Gravitas defines the cloud as a collection of hardware, networks and converged technologies that allows for maximum flexibility, mobility and versatility. Cloud represents a significant shift in IT infrastructure, moving away from a suite of separately managed systems towards converged technologies that can be easily managed through a single console. This translates into better control, security and operational efficiency in addition to the cost benefits of virtualisation.

SAM WHEELER (SW): Cloud services provide many benefits for hedge funds. First, it is more cost efficient to lease hardware than purchase it directly, in addition to not having to allocate floor space for servers, pay IT maintenance professionals or cover the raw electricity to power the equipment. Second, cloud services provide rapid access to, and deployment of, core services and infrastructure. Third, the vast pools of computing power available through cloud services provide managers access to greater computing power than historically available, at a lower gate to entry. More managers are therefore now able to run the type of models and analyses not otherwise viable with in-house resources. Cloud services also provide ‘out of the box’ disaster recovery and business continuity plans, as well as a certain amount of uptime guarantee, and unified service packages certainly beat the logistics and admin of managing IT in-house.

HFM: Why is cloud computing becoming more popular with hedge funds?PM: Economic uncertainty and a more competitive investment climate have played a large part in the emergence and acceptance of cloud computing. Funds are expected to keep pace with new technologies to secure, process, and retain critical investor data, achieve greater operational efficiency, and to ensure failsafe provisions like disaster recovery are in place for business continuity. Hedge fund managers can now utilise robust trade execution technology and process incredible amounts of data in the cloud at significantly reduced operational costs. Cloud computing significantly reduces operational downtime due to IT problems. The cloud acts as a time machine of sorts by taking regular “snapshots” of entire systems, thus enabling administrators to rollback to any given point in time. This technology significantly reduces the time required to resolve IT-related issues.

SW: Cost is a major reason, but there are others. It is being realised that the cloud provides access to a vast amount of computing power that can be harnessed to not only run your core business, but to also offer new and more efficient ways to communicate with your investors, service providers and partners. Increasing popularity has also come as cloud service providers are recognising the sales opportunity represented by the financial services industry – and are starting to specifically target asset managers with conferences and symposiums.

HFM: How can investors benefit from a hedge fund’s cloud computing service?PM: Investors expect hedge funds to have best-in-class infrastructure, security and data retention, and this was often a challenge due to cost and complexity. The outsourcing model to cloud has levelled the playing field to some extent, especially with respect to smaller funds that previously were not able to afford this level of technology. The cloud provides funds with access to on-demand resources, sophisticated technology and security to execute trades and support daily operations. Through the cloud, hedge funds have the flexibility to rapidly implement the newest trade platform, enterprise CRM systems, or risk management platforms while keeping costs and overhead to a minimum. This allows them the freedom to trade, while providing necessary transparency to investors.

SW: Managers can look to reduce costs by utilising cloud services – costs that could be passed on to investors directly or reinvested in the firm, both of which ultimately benefit investors themselves. The power cloud services offer also means the gate to running more complex trading, analytical and operational algorithms is also lowered. This potentially means competition between managers using such approaches is higher, which could lead to their improvement and refinement – again, beneficial to end investors. The cloud also opens up new ways firms can integrate and communicate with one another. Increasingly, we are seeing so called ‘investor portals’ which give investors a single point of entry for their trade statements, account information, mailing lists etc. The ease of access and depth of information investors have can only improve with the uptake of cloud services.

HFM: Are regulators interested in how a hedge fund uses a cloud computing service?PM: As with other aspects of financial services, cloud services for hedge funds must be designed, not just with performance and security in mind, but also according to regulatory requirements and best practices. Cloud provides a third-option to meet compliance requirements for data retention and business continuity, painlessly. As such, registered investment firms often use the cloud as a cost-efficient solution for retention of large volumes of data for compliance.

SW: Yes. The various aspects of cloud services fall within existing regulations, however as they continue to evolve our idea of what constitutes, for example, ‘personal data’ is likely to change, spark debate and subsequently refine regulation. We are increasingly seeing debate about data ownership, control, access and rights in the press. Although existing regulation doesn’t do much to explicitly mention cloud computing, there are a number of regulations that work together both within Europe and internationally. What cloud computing is critically doing is opening up regional boundaries for where data may be at any given moment, which is a potential cause for concern for all involved.

HFM: Is there a downside? Are there security/counter-party risks and what would happen if the cloud provider collapsed?PM: Although the momentum is moving towards cloud solutions, security is still a concern for many hedge funds. Cloud service providers who work with financial services clients understand the unique needs of hedge funds, in terms of performance, reliability and security. As a minimum, hedge funds should look for hosting at a Tier 4 data centre which is built on a fault-tolerant site infrastructure with electrical power storage and distribution facilities guaranteeing 99.995% availability and independently dual-powered cooling. Most cloud service providers will support segregated multi-tenant environments through virtualisation which means critical investor data is isolated, and offer heightened security measures as a baseline. In the event of the collapse of a cloud provider, the outcome would be dependent upon the type of services it offers and the severity of the incident. Most cloud providers support data centres in multiple geographic locations and in the unlikely event, the data would still be accessible.

SW: The key risk for any financial institution is the security of their data while it is being stored and transmitted, in conjunction with actually getting access to it as and when needed. This is why a number of the larger banks who looked at cloud services a few years ago opted to go for either internal private clouds or hybrid cloud deployments; meaning they are able to physically maintain control over their data at all times. For external clouds, as encryption ever improves, it is less transmission and more data storage which poses the biggest concern. Theft and hardware destruction aside, it can be hard to know where your data is at any given moment. In addition, if a cloud service provider collapses there are questions to what you, as a customer, are left with.

HFM: What can you see the next 12 months holding for cloud computing in the hedge fund space?PM: Hedge funds will continue to realise the economies of scale in cloud computing. The ’as a service’ offerings will gain significant traction in the hedge fund space in 2012. Managers will benefit from the cost savings and quick availability of cloud services such as IaaS (Infrastructure as a Service, such as storage, hardware, servers and networking components), PaaS (Platform as a Service, for example Salesforce.com), AaaS (Application as a Services, such as Microsoft SharePoint) and SaaS (Security as a Service, for example intrusion detection systems).

SW: The next 12 months will see a steady growth in the awareness and adoption of cloud services. Much of what we do daily is now linked to the cloud in some way, and with the growing ubiquity of mobile devices, its importance and relevance has been solidified. There are still concerns that need to be worked on and alleviated before hedge funds are less hesitant over larger scale reliance on cloud services, but as providers continue to work with managers, these are sure to be resolved.