How the Hedge Fund Cloud will Restore the Industry’s Mojo
First Published Friday, 16th September 2011 02:28 pm from Xand : pcurley
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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. 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. 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. 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. 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.
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