The last few years have been undeniably tough for the once brash hedge fund industry. Recent headlines do not suggest any improvement with August being the worst month for hedge funds since October 2008, and marquee firms like Paulson & Company firm down 34% year-to-date. Â Prior to the crisis of 2008 the industry appeared to be on a steady upward trajectory, evolving from a small, scrappy upstart, that catered to high net worth investors, to a more formalized $2 trillion industry, that serviced the largest pension funds in the world. Since the crisis, however, the industry seems to have lost its way. What exactly happened and how can what we are calling the "Hedge Fund Cloud" return the industry to its former glory?
Pre-crisis, managers believed that the measure of success was not only returns but assets under management. In their race to acquire new assets, managers were motivated to "institutionalize" their infrastructure so that they could go after the really big allocations from large pension funds and endowments. For many firms this institutionalization meant leaving the relative simplicity of their single prime relationship to the much more complex world of building out their own multi-prime infrastructure. Almost overnight managers found themselves running complex and unwieldy businesses. Seemingly simple operations like adding a strategy, that required a new asset-class, or producing a new report, became long and involved IT projects. Â Any thought of outsourcing any of this burden was dismissed because of perceived privacy and control concerns.
The actual crisis further exposed the inflexibility of hedge funds' infrastructures. Managers struggled to view their true exposure across asset classes and multi-prime relationships. Just when managers most needed their former agility they discovered that they had become prisoners of their own expensive infrastructures.
Fast forward to today. We are still experiencing the after effects of the crisis. A strong regulatory backlash response has been unavoidable. There is still tremendous uncertainly about the true impact of these new regulations but it is certain that the business of running a hedge fund will become even more complex and costly. How can the industry remove itself from this funk and prepare itself for the next crisis? The answer is that the industry needs to return to basics by once again making alpha generation its sole focus. The industry needs to regain its former investment agility. In short managers need to get out of the running-a-hedge-fund-business and get back to the investment business.
Fortunately what we call The Hedge Fund Cloud offers managers the best opportunity to get back to basics. Â The Hedge Fund Cloud allows hedge fund managers to focus on alpha generation by moving all non-core infrastructure to the Cloud. The fast-maturing ecosystem of cloud-based hedge fund service providers offers institutional-grade infrastructure with better security than traditional deployment models. To return to basics managers need to take an impartial eye to their existing infrastructures and ask themselves what is really essential to alpha generation. Everything else should be stripped away, moved to the Cloud, and turned into a utility.
To assist in this task the Hedge Fund Cloud can be broken down into three main components:
1 - Hedge Fund Cloud - Software-as-a-Service (SaaS)
Many of the important hedge fund systems including execution management, order management, risk management, portfolio management etc. are now available from the leading providers on a Software-as-a-Service (SaaS) basis. This means that the software can be accessed from anywhere as a service through a thin client or browser. SaaS includes upgrades and disaster recovery and is paid for on a subscription model. Most hedge funds, with the exception of perhaps quantitative funds, will find SaaS solutions more than meets their needs.
2 - Hedge Fund Cloud - Infrastructure-as-a-Service (IaaS)
IaaS involves the outsourcing of physical hardware such as telephony, storage, servers and networking components. Again most hedge funds can benefit from outsourcing the part of their business.
3 - Hedge Fund Cloud - Data-as-a-Service (DaaS)
The DaaS model delivers market data via web services or API's rather than the traditional data feeds and flat files. Â This approach allows firms to 'call' just the specific subsets of data directly into their applications leaving the rest on the Cloud. This means that firms do not have to build or manage a full data management infrastructure.