Talkin’ ’bout a generation can be daunting. There’s Generation X and Y which kind of makes sense, but then Z is I or @ or Me. The iPhone 4S is the 5th generation of the device which means that generation 6 will be the iPhone5. As confusing as this is already, technology generations last considerably shorter than family generations, and sometimes they are so short you barely mention their existence.
So I was quite interested when I was invited to a breakfast seminar on “Third generation Cloud Computing for Hedge Funds” as I had completely missed generation number 2. The idea is straight forward. Rather than outsourcing all IT services to a public or private cloud, the third generation is all about being hybrid and pushing a number of IT services into the cloud whilst keeping others within the direct reach of a hedge fund.
For me however the two never really seemed to be a good match, considering the financial services’ reluctance to give away control over any of their data. They have valid reasons for this. A regulator may question whether data is stored appropriately and safely. There’s no physical server room to show in case an interested investor pays a visit, and if an external provider goes down there is a knock-on effect on a number of funds which could be disastrous for the whole industry. In addition availability is key and any services in the cloud need to be easily and speedily accessible, at any time.
Having listened to a number of arguments, it made more sense to me why companies within the financial services industry – and hedge funds in particular – are amenable to the concept. Being active high-frequency traders, they use state-of-the art IT systems and consequently need to be forward-looking when it comes to embracing new technologies. Outsourcing IT services promises they can fully operate their business from anywhere with a very basic equipment such as Internet connection and laptop. This significantly reduces operating costs which can be £30,000 per month, music to fund managers’ ears who are always keen to increase their margins.
Hedge funds take a risk by speculating on specific market developments. That risk is assessed in strict due diligence procedures, and funds will only choose to put money where they expect to make a substantial profit. Likewise you would expect them to outsource parts of their business only if they’re absolutely certain this is the right thing to do. They will thoroughly check any provider’s longevity of clients, profitability and how they deal with outages. And they will check how much of the provider’s cash is re-invested in the architecture.
I’m still a bit sceptical, but given the mouth-watering incentive of lower costs I can see why hedge funds are attracted to Cloud Computing. As hedge funds are, in their own way, cutting edge in the financial services industry, they may well lead the way for many more players in the industry following suit. There are a few obstacles and it’s unclear how these can be surmounted, but first steps have been taken and with Cloud Computing having received the official EU seal of approval recently it will be even more exciting to see whether the hedge funds’ current IT gamble will pay off.