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Hedge Funds and The Cloud


Date: Friday, October 12, 2012
Author: Nigel Someck, ProHedge

Building up to GAIM Ops 2012 on 16-18 October in Paris, PROHEDGE will be taking a weekly look at some of the key issues to be addressed at this year’s event. Last week we explored Hedge fund risk management; this week we examine whether cloud computing can save hedge funds money.

Cloud computing in all walks of industry and commerce is becoming more widely used and trusted, particularly amongst start-up organisations. There are many reasons why a hedge fund would opt for cloud-based technology: It removes the burden of IT maintenance, lower cost of ownership, reduces ‘key-man risk’, provides contingency, not location specific and the list goes on. A cloud solution can also provide access to tools that would otherwise have been unattainable for a smaller institution; many hedge fund technology providers are moving their solutions onto the cloud for this very reason as we saw in a previous article.

Even with all these benefits, do cloud solutions save hedge funds money? Typically a cloud solution will cost more in absolute terms in comparison to their locally installed rivals. However, it would not be a like for like comparison without factoring in all the additional services a cloud offers which would need to be procured separately with a non-cloud solution:

a)       Hardware: Most cloud solutions will completely remove the need for dedicated hardware, as it is all provided by the vendor.

b)       Maintenance: the biggest saving, there will be no need for an in-house IT or technology support resource for the product.

c)       Disaster recovery: Most, if not all cloud services will include some form of disaster recovery.

d)       Implementation and upgrades: Cloud solutions are typically less onerous to implement and upgrade, since any work carried out for one client can be rolled out across the entire user base.

It is impossible to quantify the actual realised savings since every system is different; however, there are huge savings to be made, especially over the long term.

It is not just cost savings that make the marriage between cloud and hedge fund so harmonious. Fund managers want to focus on generating returns for their investors, trading and monitoring the market for investment opportunities. The regulators have ensured that this can no longer be the case and a fund manager must now juggle his investment mandate with cumbersome regulatory reporting. The last thing a hedge fund manager needs is to get his or her head round a complex technology solution. Regulators have actually removed one of the most prominent counter arguments for using the cloud. Hedge funds used to be very wary about entrusting their private investment data to a third party. Now that regulators have forced them to become transparent and report their holdings information, this blocker has become defunct.

For these reason the cloud makes so much sense, it completely removes that technology burden away from the manager so they can focus on generating returns. Indeed, many fund administrators and third party service providers are now trying to take the regulatory burden away from managers as well, by offering outsourced middle-office services following the success of the cloud.

As bandwidth speeds increase and connections become more stable the adoption rate for cloud computing amongst hedge funds will only increase and software providers that do not provide cloud solutions will very rapidly fall behind the curve.

Looking forward to GAIM Ops 2012, we will be hearing from Tim Barefield, COO of Pershing Square Capital Management on 5 reasons why moving to the cloud can save you money. Please click here to find out more about the conference