How the Hedge Fund Cloud Can Restore the Industry’s Mojo
First Published Saturday, 17th September 2011 02:27 pm from Xand : pcurley
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alt="hedge fund cloud" width="261" height="196" />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 term the "Hedge Fund Cloud"
return the industry to its former glory?
Institutionalize or Die
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.
Prisoners of their own Hedge fund
Infrastructure
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
what is certain, is 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.
The Hedge Fund Cloud to the
Rescue
Fortunately, the Hedge Fund Cloud
offers managers the opportunity to get back to basics. The Hedge
Fund Cloud allows firms to focus on
alpha generation by moving all non-core infrastructure to the
cloud. The Hedge Fund Cloud is made up of the fast-maturing
ecosystem of cloud-based hedge fund service providers who have
now begun to offer institutional-grade infrastructure.
The three main components of the Hedge Fund Cloud are as
follows:
1 - Hedge Fund Cloud
- Software-as-a-Service (SaaS)
SaaS
means that software can now be accessed through a thin client or
browser, from anywhere, as a service. SaaS includes upgrades,
disaster recovery, and is paid for on a subscription model. Many
of the important hedge fund systems including execution
management, order management, risk management, portfolio
management are now available from the leading providers on a
Software-as-a-Service basis.
2 -
Hedge Fund Cloud - Data-as-a-Service (DaaS)
DaaS delivers financial market and reference data via
web services or API's rather than the traditional data feeds and
flat files. This approach allows firms the ability to query and
use just specific subsets of data rather than downloading and
storing masses of data. It also means that firms do not have to
build out data management infrastructures.
3
- Hedge Fund Cloud -
Infrastructure-as-a-Service (IaaS)
IaaS
involves the outsourcing of physical hardware such as telephony,
storage, servers, and networking components.
To take advantage of this new model, managers must now
take an impartial eye to their existing hedge fund
infrastructures and ask themselves what really is vital to alpha
generation. Everything else should be stripped away, moved to the
cloud, and essentially turned into a utility. This return to
basics offers the industry the best chance to get back to the
pre-crisis glory days and to restore its mojo.
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