Cloud Adoption

Trends within the investment management industry

MARY BETH HAMILTON, EZE CASTLE INTEGRATION

The hedge fund industry today is grappling with a host of new challenges including increased due diligence and investor expectations combined with growing regulatory scrutiny and requirements. In concert with this evolution, technology decisions are coming to the forefront of the conversation as expectations around data protection, information security and cost-effectiveness continue to expand.

To address the evolving technology component, hedge funds are increasingly looking to cloud services. Cloud computing allows firms to use a scalable, fully-managed technology platform for delivery of business functionality, application hosting and complete IT outsourcing.

To more fully understand cloud computing adoption trends in the investment management industry, Eze Castle Integration commissioned IDG Research to execute a market survey. Key questions that were answered by 125 US-based hedge funds and investment management firms included:

• A firm’s first cloud initiative and current use of the cloud for services;
• Deployment model being utilised;
• Key factors driving a firm to select cloud services; and
• Real or perceived barriers to cloud deployment.

The one compelling statistic to come out of the survey was that more than eight out of 10 investment firms contacted (87%) indicated they were either currently using or planning to use some form of cloud services in the near future. Eighty-seven percent is noteworthy and helps dispel the talk that cloud computing is a passing fad. Survey responses validate that cloud computing is a major consideration for firms and will continue to be as firms seek to capitalise on the real benefits this technology has to offer.

The light bulb moment
So what is driving the adoption of cloud computing? The prospect of transferring upfront, costly capital expenditures (CapEx) to longer term, recurring operational expenditures (OpEx) is clearly appealing to current and prospective cloud users. With a typical cloud solution, investment firms are not required to purchase upfront hardware and instead can leverage the existing back-end infrastructure of a third-party cloud provider. With the cloud, firms pay a clearly-defined, per user per month cost for the designated service. Cost has always been an important factor when it comes to using the cloud, indicated by only 6% of survey responses noting it was not very or not at all important.

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Beyond cost, increasing the speed of technology deployment was a close second when it comes to factors influencing cloud purchases. Eighty-three percent of respondents ranked it as important or extremely important, and, like cost, only 6% consider it an insignificant factor. Particularly for startup firms, the appeal of getting up and running quickly is a great one. Traditional, on-premise infrastructure solutions can take up to six to 10 weeks to design and implement. Cloud solutions, on the other hand, can take a fraction of that time, with some smaller implementations requiring only hours or days for deployment.

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Coming in at number three, respondents viewed the ability to simplify IT management and support as a key drive to adoption. While some alternative investment firms like the ability to control IT in-house and manage the infrastructure from within, the appeal of outsourcing day-to-day functions and support to a third-party cloud provider is a hard one to pass up.

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A pause before the light bulb moment
While the cloud can hold distinct advantages versus traditional on-premise IT solutions, selecting which strategy is right for a firm should not be taken lightly. Just as important as the factors influencing the move to the cloud, we also asked respondents to rank the significance of certain barriers or concerns with cloud computing.

Respondents ranked concerns about cloud computing security (i.e. risk of unauthorised access, data integrity, etc.) as significant or extremely significant 86 percent of the time, which is not necessarily surprising. Security remains a top concern for hedge funds and alternative investment firms throughout the industry. Unlike traditional, on-premise technology infrastructures, cloud users must rely on unseen infrastructure managed and monitored by a third-party in most cases. By giving up that inherent perceived security once had by managing one’s infrastructure in-house, firms often feel concerned about the integrity and safety of their data and personal information. Asking a cloud provider the right questions, and getting the right answers, can help resolve security concerns.

Second to cloud security, concerns about information governance or meeting regulatory or compliance requirements were also seen as significant or extremely significant barriers to cloud adoption, by 71 percent of respondents. Regulatory pressures have increased exponentially in recent years, particularly with the introduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Post Dodd-Frank, firms are working hard to meet new requirements and maintain internal best practices to satisfy regulators. Most legal requirements are not specific to cloud computing, however firms should work with their cloud services providers to ensure data is encrypted both at rest and in transit in the cloud and all data is backed up and archived to a secure location, should a regulatory body require the firm’s records for any reason.

A third potential barrier noted by respondents was the potential lack of custom application availability or integration. Application integration is a key driver for firms selecting vertically focused, private cloud providers who have experience supporting the application and are certified by the vendor to do so.

The initial dip: first cloud initiatives
Now that we’ve explored why firms are heading to the cloud, let’s look at their first cloud initiatives. The survey found that the first cloud initiative for 57% of firms was basic business and office functionality. Basic office functions include email, file services, storage and mobility functions. By utilizing a third-party’s cloud, firms can also easily add additional resources to their upfront purchases including storage space, computing power and networking power.

Next up, 34% of respondents said they first used the cloud to host their key financial applications, and only 9% opted for complete IT outsourcing to the cloud on their first try.

Current & future use of the cloud
Of the 125 firms that completed the survey, 79% responded that they were currently using the cloud. When asked how they were currently utilising cloud services (multiple responses were accepted), 65% indicated they were using the cloud for basic business/office functionality.

Financial application hosting is the next most popular use of the cloud according to 50% of firms surveyed. Firms receive several advantages to hosting their financial applications in the cloud rather than the traditional practice of running and managing an application on an in-house server. With the cloud, firms can leverage a third-party provider’s enterprise-grade infrastructure that is then responsible for the management and monitoring of each application. Firms are also able to scale easier as a hosted platform can provide virtually unlimited computing resources and easy expandability to support a firm’s need to add users or increase resources on-the-fly.

In addition to basic office functionality and application hosting, firms are also using the cloud for complete IT infrastructure outsourcing. This can be a reliable option for firms who do not want, or have the resources to manage, maintain and upgrade their own technology infrastructure in-house. With high equipment costs and onsite maintenance required, many alternative investment firms are turning to the cloud for simplified IT management, reduced costs and increased flexibility.

Public, private or hybrid
When it comes to cloud deployment models, private emerged as the method of choice with 71% of firms responding that they are using a private cloud. While not all private clouds are equal, traditionally they are better suited for hedge funds and investment firms who require a great deal of sophistication, application integration and high-touch support. Going with a private cloud also helps firms overcome the previously noted concern about application integration and support in a cloud environment.

Of current cloud users, the overwhelming majority (71%) indicated they were using a private cloud solution. Hybrid clouds – defined as a composition of two or more clouds that remain unique entities but are bound together – are the second most popular choice at 37%, while public cloud users totalled 33%.

For those who are not yet using the cloud but are planning to, the responses tended to mirror those of current users. Forty-six percent of prospective cloud users anticipated using a private cloud solution, while only 23% said they would likely use a public cloud. 31% will opt for a hybrid solution when they make the move to the cloud.

Decision time & final thoughts
Lastly, we asked respondents how they evaluated cloud providers. Following is a snapshot of the criteria respondents viewed as most important when selecting a cloud partner:

• Cost-effective model
• Knowledge of how my organisation operates and experience in building and operating cloud environments in my vertical/industry
• Experience establishing effective security policies and procedures in the cloud
• Proven post-sales support and service
• Cloud provider’s technology infrastructure
• Certified application availability
• Innovative ideas, in-depth insight and expertise regarding cloud trends and direction
• Prior experience with the vendor
• Geographic reach/global support

These survey findings go a long way in disproving any myth that cloud computing is simply a passing trend in the investment industry. Hedge funds and alternative investment firms have confidence in the cloud and are using it to manage and maintain their critical infrastructure and applications. That the majority of firms are using private cloud solutions is important to note and a fact that shows many firms may be wary of working with larger, less vertically-focused public clouds which traditionally have less responsive support teams and application integration frameworks.

Finally, while there may always be firms who choose to rely on the traditional, on-premise technology infrastructures of the past, the number of cloud users will continue to climb in the years to come as the key drivers (cost, flexibility, simplicity) continue to prove significant to firms of all types and asset classes.