We’ve entered the next phase of the age-old “buy vs. build” debate. Owning and operating on-site IT resources comes with a heavy cost, leading many investment managers to evaluate cloud-based IT solutions for their businesses. Security, privacy and application performance concerns that once plagued cloud providers have been alleviated, and the hedge fund industry is embracing the cloud at an increasing rate to embrace new levels of cost predictability, business continuity and scalability.
Small- to medium-sized hedge funds need predictable expenses to manage regulatory and investor pressures to do more with less. They typically don’t have the budget to absorb surprises related to building and maintaining an on-site data center, which can be a major distraction, a budgeting nightmare and a significant risk, with delayed and over-budget build-outs. A cloud services model offers an already functional infrastructure, deployment in days, and drastically reduced start-up risk. Cloud providers own all the equipment and are already used by other funds, so the manager doesn’t need to write the big check up front or worry that any details were missed.
“Lumpy,” unpredictable expenses don’t stop once the datacenter is built. Equipment can break or simply need to be replaced, and firms face mandatory system upgrades, data corruption and hard drive failure, among other challenges. Adding or removing capacity can also result in hard-to-predict costs, and staff levels must be adjusted at certain thresholds — preferably before workloads reach critical levels. Cloud service providers hedge this risk in exchange for a predictable monthly subscription fee where adding and removing capacity is even somewhat predictable, since the manager typically knows the cost (or the savings) and the required lead time for adding (or removing) capacity.
Hedge funds are held to high standards when it comes to their business continuity plans. A technology failure can be disastrous for money managers — yet many have decided to entrust cloud service providers to “disaster proof” their business. Why? Because dedicated cloud service providers benefit from economies of scale and offer a product that is constantly validated by others using the same service. Relocating and replicating IT resources to off-site locations also protects businesses from disasters in primary offices. Funds can tailor solutions to their specific business needs, or outsource “a-la-carte,” moving all their IT resources off site, or outsourcing only key components.
Key man risk is also common in hedge funds with only one or two IT people that are qualified to trouble-shoot technology issues. If they are unavailable at the wrong time, it can be disastrous for the business. Consultants can help in an emergency, but they still require time and money to get familiar with the IT environment. Key men also pose a risk with their own limited capacity; it’s not feasible for one person to monitor the health of an onsite data center 24/7 with very short response times, whereas cloud service providers have dedicated staff monitoring the network 24/7.
Cloud providers stand apart due to their unique ability to quickly and cost-effectively meet changing business needs. Fund management companies no longer need to worry about how to expand their IT capacity, technical staff levels or server space, or fund new hardware and software resources to grow or enter new markets. Instead, managers can embrace an outsourced model that lets them focus on their core business rather than invest time and effort into solving IT problems. ‘Scaling down’ can be as simple as a phone call, meaning fund managers no longer need to focus on staff lay-offs, re-selling hardware, or low data center use.
For hedge funds, it’s clear that moving to the cloud is the future, as the performance and economic advantages deliver the chance to scale more effectively, run operations more efficiently and create new services. Cloud offerings may still be relatively new technology, and certainly, some of the concerns to date have proven valid. But taking advantage of cloud IT services has gone mainstream, with the largest corporations and banks now turning to cloud infrastructure to manage some or all of their critical IT operations. Fund managers owe it to their firms and themselves to understand the many advantages this model can provide.
Chris Grandi, CEO of Abacus Group
Chris is a founding member and the CEO of Abacus Group, a cloud infrastructure provider for hedge funds. Prior to launching Abacus, Chris served as president of Eze Castle Integration, where he helped grow the company from 30 employees to over 300 employees servicing more than 450 hedge fund clients. Chris previously co-founded and later sold Dynamic Transactions, Inc., which developed internet payment software for commercial banks, and before that, Chris worked in the fixed income, currency and commodities division at Goldman Sachs in New York. Chris holds a bachelor of arts from UCLA, and an MBA from Harvard Business School.