Hedge Funds are Outsourcing to the Cloud

But which one?

Eze Castle Integration

Global provider of managed IT services, Eze Castle Integration, explores the benefits, the trade-offs and the considerations of the various cloud deployment models.

The future is cloudy, but that’s a good thing

The hedge fund industry continues to thrive as assets hit a record high of $3.2 trillion last year, according to the latest figures published by Hedge Fund Research. With over 10,000 hedge funds spanning the globe today, the demand for seamless, efficient IT solutions is greater than ever before.

The combination of a changing economy and new regulations coming into effect puts pressure on internal IT teams to seek new ways to boost efficiency, remain compliant, whilst also focusing on important growth and strategic goals of the fund. So, in an industry where down time is not an option, cloud-based services are a popular choice. Most commonly delivered by a third-party provider, the cloud computing model enables firms to host their services and software applications on a web-based repository known as ‘the cloud’. The cloud has capabilities to support front, middle and back-office functions. This includes everything from business applications and client relationship management systems, to data management solutions and accounting systems.

When weighing adoption of cloud services, it is important to understand the difference between cloud deployment models, namely the private, public, and hybrid cloud.

Private cloud: the trusted answer for high-performance

With its security, privacy, and performance, the private cloud has been the go-to option for financial and investment firms that require enterprise-calibre IT infrastructure. That’s because the private cloud is the platform that provides the highest levels of performance, security, and resiliency for enterprise business functionality. Furthermore, a private cloud enables you to exercise greater control over network traffic – in terms of security, quality of service, and availability.

In most cases, that private cloud is professionally managed by a service provider solely focused on monitoring, managing, and maintaining that infrastructure to meet business requirements and compliance directives. Thus, firms benefit from seasoned, industry-experienced professionals who live and breathe financial IT.

Public cloud: a more open and affordable infrastructure

For many firms, so-called public cloud infrastructures offer compelling opportunities and advantages. For example, Microsoft’s Office 365 public cloud is one of the most popular public cloud options, offering users complete access to its flagship productivity applications (e.g. Microsoft Word, Excel, etc.), Microsoft Exchange, mobile device access, storage, and other services.

For many smaller and younger firms, the flexibility and ease of deployment are persuasive drivers. What’s more, the initial costs appear to be lower for certain feature sets, although an analysis of the total cost of ownership indicates that advantage is less clear-cut.

Hybrid cloud: bringing them together

Fortunately, hedge funds and investment firms do not need to take an ‘either/or’ approach to their IT infrastructures. With a hybrid cloud approach that combines many of the most compelling features of public and private clouds, firms can leverage a uniquely flexible platform that meets a broad range of needs.

Which cloud has the edge?

The decision regarding your IT infrastructure has significant implications on the ability of your investment firm to gain and maintain a competitive advantage. As you weigh your options – private, public or hybrid – it can be beneficial to consider the following aspects of cloud architectures and weigh their importance as unique to your individual firm.

Support and service

With any technology infrastructure, the value and functionality your firm will gain should be measured against an equally essential component – support. Technology is not infallible, and as such, it’s imperative for firms to entrust their IT management to a provider well-versed in the ins and outs of technology service and support.

Firstly, it is important to think about what type of support your firm would most benefit from. Many financial firms find it’s essential to be able to rely on named individuals who can physically touch your machines, as well as understand your business workflow. Financial IT experts and investment focused managed service providers (MSPs) know and appreciate your business model and investment goals, understand the applications and technology requirements you need to power your operations, and ultimately are in the best position to address your short and long-term needs.

Public cloud providers (Microsoft, Amazon and Google), on the contrary, do not have specific knowledge of your investment business, the features you need or applications you rely on. Additionally, given their massive structures and reach among customers, it’s highly questionable you’ll receive high-touch support. More likely, you’ll be relegated to a long queue of customers waiting for nameless/faceless support – or worse, ploughing through self-serve knowledge bases.

This is where private and hybrid clouds offered by vertically-specific managed service providers (MSP) deliver an advantage. Financial and investment firms want deep experience and industry-specific expertise. With more flexibility and established relationships with clients, these cloud providers can take a proactive approach to ensure known vulnerabilities are closed and that all aspects of the infrastructure are properly and efficiently upgraded.

Availability and uptime

For an investment firm, availability is always a chief consideration. When crucial elements, or, the entirety of your IT infrastructure are hosted elsewhere, you need guaranteed uptime and predictable service levels. For IT experts, nine is the magic number – and the more of them, the better. In service level agreements, cloud providers should clearly define the contracted levels of uptime they guarantee to provide.

In many public clouds, for example, you’ll see ‘three nines’ (that is, 99.9 percent availability). While it appears sufficient, some private clouds can offer better uptime guarantees based on their infrastructure redundancy. For instance, some private cloud service providers offer a 99.99 percent uptime guarantee – and the added nine makes a significant difference.

With a hybrid approach, you can tap into multiple clouds and data centres, fortifying the necessary levels of availability your firm requires. Each cloud’s infrastructure is designed with redundant resources, network connections, storage and other vital components to offer a level of resiliency and durability, even in the face of faults and unplanned downtime.

Compliance

Insider threats are often the greatest risk exposure for investment firms, and these firms face intense and growing scrutiny from compliance regulators and auditors. But there’s more to risk management than simply securing enterprise databases. Often, a firm’s greatest IP and assets are in product plans, strategic initiatives, and confidential employee and customer records. Unfortunately, public clouds have been known to struggle in demonstrating the access controls that are needed to protect this growing share of mission-critical data.

Private cloud MSPs, however, typically offer any number of tools ideal for compliance purposes – such as file auditing and access controls. With these applications, your organisation can analyse, secure, manage, and migrate volumes of structured and unstructured data such as spreadsheets, word processing documents, presentations, audio and video files, emails, and text. And that means a private/hybrid cloud environment puts you in a far better position to ensure proper data security, governance and compliance.

Application hosting

Financial firms rely heavily on mission-critical applications that support their daily trading operations, which include everything from order and execution management, to portfolio accounting, and investor relationship management. It’s essential that you don’t experience any unplanned downtime with these applications, which could result in serious financial repercussions.

While flexible and, arguably, more cost-effective, public clouds aren’t necessarily the ideal total infrastructure for mission-critical application hosting. Especially when availability/uptime is critical and network latency is equally vital. Additionally, if your firm relies on proprietary applications, beware that some public-cloud providers may be unable to support them, in which case you might be better off partnering with a private/hybrid cloud MSP that has the financial industry experience to meet your unique needs.

Proximity

Like virtually no other industry, the success of an alternative investment firm can rise or fall based on the speed of IT connectivity. Fractions of a second are vital, which means that the three most important words in data centres are ‘location, location, location’. That’s because network latency is a crucial factor in determining the performance of mission-critical applications. In many cases, public clouds can operate out of geographically remote data centres (where it’s less expensive to procure real estate) that are significantly removed from major urban hubs and thus, away from your business, creating needless delays that the firm cannot afford.

Depending on your firm’s strategy and trading/execution goals, you may require certain proximity to data centres supported by either a public or private cloud provider. Plus, it’s worth considering the quality of service (QoS) required by your firm as your data travels across these networks. Many investment management firms prefer the comfort and security of private network connectivity, which many private/hybrid MSPs offer but few public clouds do.

The importance of connectivity

Regardless of which cloud platform your firm chooses, you will likely require access to financial and industry counterparties (e.g. brokers, dark liquidity pools, crossing networks, etc.) to support your daily trading, execution and investment management practices.

To facilitate seamless and high-performance connectivity with these third parties, financial firms must have highly secure networks via which they can communicate securely and without fear of lost connectivity. Thus, global private networks are the most effective and efficient means for financial firms to purchase and sell securities.

Financial firms rely heavily on mission-critical applications that support their daily trading operations, which include everything from order and execution management, to portfolio accounting, and investor relationship management.

These private networks often feature direct, peered connections to the very industry counterparties you require, resulting in excellent user experiences, improved performance, deeper security and comprehensive network monitoring.

For global firms with offices around the world, global private network connectivity enables seamless communication and data transmission across all locations. Managed and monitored for QoS by reputable MSPs, these networks deliver higher availability through layers of redundancy, gateway access to critical financial services networks, and a supremely secure communications method to support trading and execution goals.

Security

While your public cloud provider may provide world-class security for its services, your company is still on the hook for certifying all aspects of information security. For compliance-driven businesses, there are still countless vulnerabilities and exposures that public clouds often fail to address. Advancing security features such as multi-factor authentication, targeted attack protection and managed phishing simulations are gaining traction among private/hybrid cloud users who benefit from their providers’ extensive managed security services.

Multi-factor authentication requires at least two authenticating factors to log into a system or network (e.g. strong passwords, security tokens, fingerprint scanning) and can add an additional layer of security for users across email, applications, etc.

Since email often serves as a gateway for hackers to surreptitiously penetrate networks, it’s become essential for firms to employ targeted protection tools and advanced email precautions to ward off these threats. That’s one of the many advantages a private cloud provider can bring to a firm. For example, next-generation security technology can protect private cloud users from attacks delivered through email, social media and mobile applications, prevent advanced attacks, and minimise compliance risks.

Another benefit to working with a private cloud provider – either exclusively or as part of a hybrid solution – is that many MSPs also offer their own cybersecurity training and security plan development services to complement the protections afforded in their private cloud environment. Public cloud providers, on the other hand, may have online resource libraries, but seldom offer these types of complementary security services to their clients.

Given the sensitive nature of their data, investment firms must constantly monitor and secure their network endpoints and servers. From perimeter monitoring to antivirus protection, it’s critical to have watchful eyes on your networks at all times. Public and private cloud providers have varying skills and capacities to perform this vital task. Some cloud providers leverage tools, for example, to extend the domain name system and provide an added layer of phishing protection and web filtering. Therefore, it would be beneficial to look for a cloud solution supported by a provider with the resources and expertise to extend its solution for the highest levels of security.

Cost

At first glance, public clouds can appear to present a cost-effective alternative to private (or hybrid) clouds. But firms should look for the numbers behind the upfront expenses for a truer picture of the total cost. For instance, your per user/per month private/hybrid cloud fee likely includes many of the additional features we mentioned previously (e.g. multi-factor authentication, file auditing applications, etc.). These services are typically offered ad hoc on a public cloud environment, which means your apples-to-apples cost comparison is not accurate. To incorporate advanced security features, mobile device management and market access to financial counterparties, the line item cost for the public cloud is not as far off as you’d think.

Cutting corners in any area of technology, but particularly on support and maintenance, can carry a significantly higher long-term cost for firms. The hybrid cloud, in many ways, is the happy medium between these two options, providing more flexibility and access to public cloud features and functionality, as well the support, security and monitoring of the environment by an experienced private cloud provider – at a more reasonable monthly price point.

In the alternative investment industry, personal productivity and storage needs aren’t nearly a sufficient solution. Companies also need the accompanying services, support, maintenance, and security they find in private clouds. Adding those in an incremental fashion alongside a public cloud can create hidden expenses that outweigh initial cost advantages. Firms should perform a proper TCO analysis as part of evaluation and decision-making stages.

Conclusion

For alternative investment firms, the ultimate strategic IT decision has long revolved around the question of whether to embrace the control and professional management of a private cloud vs. the open, affordable public cloud. However, new hybrid cloud infrastructures mean that firms don’t necessarily have to make an either/or commitment.

By partnering with an experienced, industry service provider, savvy investment firms are increasingly adopting cloud services with features most relevant to them. We recommend that a decision is made after weighing the importance of email and business applications, industry-vertical support, service, availability/uptime, performance, security, regulatory compliance, and overall control.

About Eze Castle Integration

Eze Castle Integration is a global provider of strategic technology solutions and complete managed IT services for hedge funds and investment firms. With over 650 clients around the world, it delivers managed services for on-premise, private and hybrid cloud platforms as well as cybersecurity.