Building a Core Cloud Strategy for a Hedge Fund

The Hedge Fund industry is witnessing an unprecedented boom (CNBC) - a record high that has the market tizzy. Barclay Hedge reveals that Hedge funds made more than $552.1 billion – in trading profits alone. At the same time, the AUM swelled to 42% in the past 12 months, indicating a resurgence of investor trust despite the turbulent times that the industry had weathered earlier.  

It is evident that the rebound in the economy and government stimulus packages contributed significantly to the strong backdrop and increased investor confidence that we are witnessing today. But we cannot afford to overlook the role technology has played in allaying investor fears and enabling the industry to reach a "record high."  

The turbulence that markets witnessed last year due to the pandemic was reason enough for many hedge funds to change gears - from manual to intelligent automation. But even earlier, the changes in the economy and new regulations had put pressure on IT teams to explore options for ensuring strategic growth while ensuring compliance. Hedge Funds that remained committed in their efforts to adopt technology were able to shake off the monotony and chaos of antiquated processes, even while others scrambled to come to terms with the new world order (post-pandemic) that required them to approach technology outsourcing vendors to meet the remote working needs. Cloud computing coupled with AI, ML, and blockchain has disrupted the world of capital markets immensely. These new technologies have not only streamlined services but ensured transparency and cost-effectiveness as well. And that's what the investors wanted--transparency, trust, standardization, and accountability.  

Now or never - the future is cloud 

The future is in the cloud. With its "virtually unlimited storage capacity, scalability and compute facility that is available on-demand," it offers a huge advantage to hedge funds, institutional asset managers, fund administrators who have been grappling with the data problem. John Kain, the Head of Business and Market Development, Banking & Capital Markets, Amazon Web Services (AWS) Financial Services, says that within four years of his joining AWS, he has seen a significant increase in the volumes of data being placed in the cloud. He also mentions that the sophistication of cloud-based tools used by fund managers has amplified, indicating fund manager's confidence in the cloud to tackle the sheer scale of data used in making everyday investment decisions. Today the top drivers for Financial Institutions resorting to cloud usage are:  

• Reduction in costs from CapEx to OpEx: The burden of maintaining legacy architecture and overhead costs get resolved when you move to the cloud.   

• Amplifying the speed of technology deployment: With the cloud, updates are almost instantaneous. 
• Cutting costs of legacy maintenance; Simplifying  IT management and support: Maintenance and support are the vendor's responsibility.   
• Induce nimbleness and scalability: Incredibly easy to add space, storage, and RAM without waiting for lengthy paperwork, as is the case with infrastructure deployment. 
• Ensure business continuity with Disaster Recovery: FIs can ensure business as usual even during critical times with the cloud as it is equipped with disaster recovery.     

This blog will discuss what has fundamentally been the biggest disrupter of the decade - the cloud and its benefits. Apart from the private cloud, there are also public and hybrid cloud models. Financial institutions must plan before shifting from on-prem to cloud.  Many choose a SaaS-based approach. Certainly SaaS platforms on cloud are more fruitful compared to migrating legacy platforms to cloud as it delivers immediate business results. For a short or medium period of time, some satellite applications might go to cloud before going full-on SaaS. All facilitated by DevOps practices since that enables faster changers and fewer errors. 

So it adds strategic value if you have a partnership with a third-party vendor with experience handling cloud transformation journeys, specifically for FI’s.   

Choosing your Cloud - Public, Private, Hybrid  

Public cloud - open and affordable 

The public cloud infrastructures like Azure, AWS, and Google Cloud offer highly compelling incentives and advantages for hedge funds and asset management firms, including small firms like family offices, thus leveling the playing field immensely. Flexibility and ease of deployment are persuasive drivers when it comes to choosing the public cloud model. In addition to this, the costs of this model are readily acceptable to even small players.  

The most popular public cloud offerings for financial institutions include ancillary systems like cloud-resident office suites such as Microsoft Office 365, customer relationship management systems (CRM) like Salesforce, Market research systems, and HR systems. 

Limitations of public cloud:  

Despite some of these obvious advantages, some big financial institutions remain unwilling to outsource their core banking structures and much of their mission-critical systems into the cloud, where there have been some highly publicized security and data breaches in the past. 

The concern arises from the financial institution's fiduciary responsibilities to its customers. If any financial/sensitive data gets leaked/compromised, the financial institutions face significant liabilities resulting from identity theft, fraud, and other malicious acts. However, this doesn't mean those large financial institutions aren't invested in public cloud solutions. They are raising significant engagements with public clouds but in areas that promote collaboration among employees and departments that help them reduce the costs of internal IT.  

Apart from security, scalability was another primary concern. The File sharing Tools and Services are not scalable due to rising costs, and as the firm grows, it (the firm) requires more than file sharing among a small group of people. In due time, a growing firm needs CRM, OMS, accounting tools, etc., which File Sharing tools cannot accommodate.  

Private cloud - In-built disaster recovery and high performance  

The private cloud has been the go-to option for financial and investment firms requiring business-class IT infrastructure. With its inherent security, privacy, and performance, it provided a seamless experience. In addition, a private cloud allowed the firm to exercise greater control over network traffic in terms of security, service quality, and availability. In most cases, the private cloud is operated professionally by a service provider based solely on controlling, managing, and maintaining the network to satisfy business requirements and compliance directives. Thus, businesses benefit from seasoned industry professionals with expertise who live & breathe private financial IT. 

If security and high-performance matter most, then it is the private cloud that is best. You do not have to invest in disaster recovery with a private cloud as it is already in-built into the cloud offering. 

Hybrid cloud - a mix of private and public 

Hedge funds, Asset managers, and other investment firms need not take an either/or approach to their IT infrastructures. Hybrid clouds – defined as a composition of two or more clouds that remain unique entities but are bound together – are the most popular choice today. Through a hybrid cloud solution that blends many of the public and private cloud's most compelling characteristics and features, firms can utilize a unique, flexible, and scalable platform that serves a wide variety of the firm's needs while keeping all regulatory compliance and security measures intact. In addition to the combined benefits, the beauty of the hybrid cloud is that it supports a slow transition, too, as risk is mitigated, compliance requisites are understood, and budgets get approved. As per the Hedge Fund Journal, "this is where working with a trusted cloud provider can add value to the process and ensure the benefits of hybrid cloud are realized." 

Any talk about hybrid cloud would be incomplete without mentioning APIs and API orchestrators like Postman, which are gaining ground for facilitating app to app conversations, and DevOps and other Orchestrators given that the next-gen Dev environment on Cloud would be underpinned by tools such as Terraform, Ansible, Octopus etc. These automate the “Integrated Pod” structure, starting from rapid fire spin up/down of infra, testing out code, and automated code deployment/integration, saving time and effort.     

Why cloud? 

More control and less chaos with cloud  

Cloud technology has unequivocally also changed the way that hedge funds run their operations today. It is not an exaggeration to say that the public cloud, led by the growth of Amazon Web Services and Microsoft Azure, has been a game-changer and arguably has allowed small hedge funds to compete on a level playing field. The cloud with its capability to support front, middle and back-office functions - from business applications to data management solutions and accounting systems is one of the most powerful assets for the 10,000 odd hedge funds spanning the globe today, as the demand for seamless, scalable, and efficient IT solutions grows exponentially. With the cloud, organizations have more control over their processes. Data management and storage also become less of a concern when one moves to the cloud.     

Innovation begins with cloud   

The advantages of cloud-based solutions are many and go beyond cost efficiency and access to highly scalable storage and computing power. The most significant benefit that the cloud offers hedge funds is that it quickly opens the doors for new opportunities. Let's take the example of Northern Trust, which uses its novel cloud-based platform to update client systems 20 times in a month or more, even as competitors struggle to update their clients' systems on a quarterly or annual update cycle.   

Elaborating how the cloud-based platform mitigates risks, Melaine Pickett, Head of Front Office Solutions, Northern Trust says, "That de-risks the releases for our clients – because we're not releasing huge chunks of code and hoping nothing goes wrong – and it also makes us able to iterate very quickly because we're not waiting until the next quarter or next year to add new features or make other changes." 

Leveling the playing field with cloud-based SaaS   

The one with the next big idea leads the race in today's digital world. We have examples like Kakao bank of South Korea which onboarded millions of customers in a week - thanks to its extremely powerful platform - who have proven that small can be powerful. As Ranjit Bawa, principal and U.S. technology cloud leader with Deloitte Consulting LLP says, "Innovation can’t be mandated, but innovative teams can be empowered with tools that let them test the waters on their own.” And the cloud is one such medium.   

To quote Bawa, "the cloud democratizes the ability to test great ideas and bring them to life." And by doing so, it levels the playing field for emerging managers – who are high on ideas and innovation. Though constrained due to bandwidth and headcount, cloud platforms provide them tremendous opportunity to test out new ideas.    

Cloud as a part of Business Continuity Plan 

Last year, small and big hedge funds suffered due to an unforeseen crisis - the coronavirus pandemic. Nobody had expected to be in the midst of a situation where remote working would be the only option. Firms that had invested in the cloud infrastructure could wriggle out of the crisis relatively unscathed, but others were forced to rethink their strategy. The days of over-reliance on manual labor were over. As a part of the business continuity plan (BCP), firms were forced to either implement a cloud-based infrastructure or work with a technology vendor like Magic FinServ to meet their IT and software needs.    

 The future however is multi-cloud  

Paradoxically the over reliance on separate cloud environments has led to silos again. So we have data developers, IT teams, cloud architects, and security teams with diametrically opposite business and technology requirements working in silos. VP Marketing, VMWare cloud, Matthew J. Morgan (Forbes) reports organizations are no longer relying on a single-vendor IT environment for cloud. Instead, the typical practice (in all organizations that he has worked with) consists of relying on a heterogeneous mix of cloud providers that necessitates a rethink of the "cloud strategy to ensure cohesiveness". As the proliferation of separate cloud environments has resulted in the creation of new silos in the IT organization." 

Hence - the need for a multi-cloud strategy. Morgan, in his Forbes article, states that the  “multi-cloud strategy and quick implementation was and continues to be a priority for the advancement of the business and the cohesiveness and security of the technology.” 

That multi-cloud is the future leaves no one in doubt. We are already witnessing organizations relying on a mix of multiple public cloud providers (AWS and Azure) working together to resolve businesses’ specific needs. Also, businesses are not seeing high value in having private data centers, and so we are hearing about more and more FIs publicly talking about adopting a multi-cloud approach. This is also important from a regulatory perspective, as firms will not benefit from relying solely on one cloud provider. 

Magic FinServ - your trusted cloud transformation partner 

As a trusted cloud partner, we service FI’s, including investment banks, hedge funds, fund administrators, asset managers, etc. While the journey might seem daunting at first, with a partner like Magic FinServ -  an expert in assessment, design, build, migration, and management of cloud for leading Financial Institutions - you can be assured of the desired results.  

We deploy new-age technologies like AI and Machine Learning to reduce the time-to-market, add security layers using the Infra-as-a-code approach, diminish system redundancy, and continuously narrow down the cloud deployment and monitoring costs. Our Opensource framework approach enables agility and cloud-agnostic development as well.  

We have worked with Tier 1 investment banks, top-tier hedge funds with up to 10B AUM, fast-growing SaaS companies from fintech and insuretech, and blockchain enterprise platforms. We cater to organizations of various sizes across the globe, serviced out of our offices in New York and Delhi.  

If you are looking for a financial services specialized cloud service provider, Magic FinServ is your ultimate answer. You can book a consultation by writing us mail@magicfinserv.com. You can also download our ebook for other information.