James Williams writes that cloud platforms are revolutionising the way hedge funds manage their businesses.
Hentsu is a cloud provider that in many ways encapsulates the way that hedge funds are using the cloud to re-imagine, and in some cases, revolutionise their approach to running a hedge fund business.
The cloud is nothing new, per se. Years ago, progressive hedge funds would look to establish a private cloud environment, but this locked them in to multi-year service contracts and created a level of inflexibility and unnecessary capital expenditure. Now, however, the public cloud is rising to prominence, thanks in no small part to the likes of Amazon Web Services and Microsoft Azure; cloud offerings with the scale and resources of two of the world’s largest technology companies.
Hentsu is the first managed service provider built on the Amazon AWS cloud platform dedicated purely to supporting hedge funds and systematic trading strategies and is redefining the way that hedge fund trading technologies are delivered. Rather than be constrained by staffing costs and the constant capital injections of maintaining a traditional IT infrastructure, Hentsu effectively uses the public cloud to free hedge funds from their IT shackles, allowing them to scale up and scale down IT resources, pivot strategies, and adapt to changing market conditions as they arise.
This is helping hedge funds to become even more agile than before. And as Managing Director and Founder of Hentsu, Marko Djukic, points out, agility equals opportunity. At a time when hedge fund fees continue to compress, it is a message that is resonating across the hedge fund firmament.
As a general trend, says Djukic, you don’t necessarily need an entire technology team if you have bespoke niche service providers who can deliver expertise: “Which is what we fit in as a wrapper around the underlying infrastructure, whether that is on AWS, Microsoft Azure or Google. We provide a level of white glove service for our hedge fund clients, combining cloud expertise in an asset management context, which means they don’t need to worry about running their own private cloud infrastructure. They can just focus on trading the strategy.”
If a hedge fund CFO draws out a roadmap and finds that 70 per cent of their current IT infrastructure is locked in to agreements of one to three years, whereas a proposal with Amazon means that 80 per cent of the infrastructure is locked in to agreements of one year or less, the option of using the public cloud becomes quite compelling.
“One client was looking to launch a systematic trend following CTA. They wanted something up and running to allow them to commence trading by a specific deadline, and within two weeks we had created the first iteration for them. That kind of set-up you just cannot achieve in the private cloud,” asserts Djukic. “Even if it costs more, the opportunity of being able to switch and change tack, as and when the fund manager needs to, is highly advantageous.”
Having the IT team identify the next best network router or switch might improve the inner workings of one’s infrastructure, but this is increasingly becoming an unnecessary focus for hedge funds. At the end of the day, questions Djukic, does it really add to a fund’s performance?
Alok Misra is co-founder and CEO at Navatar Group, a leading provider of cloud-based CRM solutions to Wall Street. Like Hentsu, it too uses the public cloud and is designed to help hedge funds reduce the complexity of running multiple systems for managing their investors and investments.
“We use Salesforce, a leading cloud provider, as well as Box and Amazon. Everything is hosted in the public cloud. We solve the basic issues for fund managers when it comes to managing their investors. They don’t need to be running five different platforms, copying and pasting data. We make things easier by offering a one-stop-shop that handles all of a manager’s needs for managing investors, investments and so forth, providing a seamless experience,” says Misra.
The concept of using the public cloud is still a struggle for some hedge funds and perhaps a step too far, at this stage. Concerns exist over the security aspect, but in Djukic’s view, the whole debate over private versus public cloud is a moot point. At the end of the day, the cloud is, by its very definition, a shared infrastructure; even if people use a private cloud they are still sharing virtual servers with others on that platform.
“The biggest difference is that the public cloud goes further and delivers utility-based computing with far greater breadth of services on top. You can add resources on demand and remove them on demand when no longer needed. All through code. You can’t do that with the private cloud, and you are mostly locked into long lease periods,” says Djukic.
A hedge fund might choose to create their own private cloud with the likes of IBM or Microsoft, but the maintenance of the infrastructure, and its security, is still taken care of by IBM. “So whether it’s a public cloud or a private cloud, it’s the same infrastructure. I don’t see how the private cloud can do much more for a manager,” says Misra, who adds:
“In fact, even if managers did build their own private cloud environment, I would argue that it would be less secure than the public cloud. The same applies to large global banks, which are still using old systems and security tools. IT is not their core competence and I don’t see how they can make their systems safer with a private cloud. Hedge funds have fewer resources than the large banks so they are in an even worse situation.”
One firm that has been running a private cloud offering for several years, and which is now embracing the potential of the public cloud, is New York-based Richard Fleischman & Associates Inc. (‘RFA’). At the end of the summer, the firm announced the launch of the RFA Multi-Cloud platform.
The new cloud solution builds upon the success of RFA’s private cloud – an infrastructure-as-a-service (IaaS) offering – which sees RFA partnering with Amazon and Microsoft. The aim is to give RFA’s clients the flexibility to use public cloud services in tandem with private cloud services with the same guaranteed level of performance and security.
Up until now, the problem with public cloud adoption was the security aspect. But as technology improves so does the ability to encrypt client data.
Commenting on the security aspect, Michael Asher, CIO at RFA, comments:
“On our cloud we use multiple layers of encryption and operating systems running on Azure or AWS are even encrypted separately. Were something to happen and Amazon wanted to access your information, it would not be possible because we escrow the encryption keys, which are then held either by RFA or the client.”
One of the key features of the RFA private cloud is that it does not build multi-tenanted environments. RFA creates virtual private environments where there is no commingling of data meaning each client is treated as a single tenant.
“For the public cloud we took the same approach,” confirms Asher. “We felt that clients would refuse to adopt the Multi-Cloud platform unless we could demonstrate that the public cloud is secure, and how we secure it.”
Hentsu’s approach to security on the public cloud was to come up with a solution that allows it to manage a client’s infrastructure with an API, which is granularly permissioned and anything that relates to the operating system and above is managed by the end client. “This is fully encrypted and they hold the encryption keys. There is a clear separation of roles, authentication and security which is not possible with any other type of set-up.
“Microsoft and Amazon spend a significant amount to make sure their clients stay secure on their platforms. That’s why we don’t bother with the private cloud; we know we can’t get to the level of security that the likes of Amazon are able to offer,” comments Djukic.
Asher explains that when clients connect to the Multi-Cloud, they do so using a point-to-point line that RFA owns and operates; one cannot access the Amazon infrastructure, for instance, other than through the RFA line. Because of this, RFA can monitor and manage traffic security.
“We have a number of prevention systems running, we have a 24/7 security operations centre, and this allows us to guarantee that network security to the public cloud environment is as robust as possible,” confirms Asher.
Another aspect of security relates to data storage on the public cloud. Microsoft, Google and others have all been in situations where they’ve had to disclose information without necessarily being able to notify the end users.
In this situation, Asher says that RFA encrypts all the information that is stored on the public cloud, in addition to the encryption security provided by the vendor.
“We felt that it was important to provide an additional layer of security that guarantees for our clients that any data stored on the public cloud is only able to be made accessible by them specifically and no one else,” he says.
A final security consideration, says Misra, relates to how fund managers actually use the public cloud. If they continue to run complex systems within the cloud environment they will remain inherently insecure, irrespective of how secure the cloud actually is. To be truly secure, he says, people should reduce the number of systems; which is where Navatar comes in.
“One client I visited recently is using various cloud platforms and had created a large number of point applications for a lot of different functions. They have a huge number of systems and there is a manual hand-off between every system. Every time you download information from one system and transfer it to another system you’ve already compromised it. The client in question thought they had built a very secure private cloud, but the reality is they have not. Not because of the cloud, but more because of the complicated environment they have built and must maintain.
“At most, fund managers should have two systems and there should be no manual hand-offs,” says Misra.
RFA’s established clients are not jumping wholeheartedly into public cloud adoption. Indeed, there are some applications such as data warehousing that are yet to be optimised for the public cloud.
But what the RFA Multi-Cloud platform now offers is the ability for RFA to extend its IaaS (it has eight data centres across the globe) by leveraging Amazon Web Services and Microsoft Azure, in so doing allowing financial institutions to reduce IT costs and build a more elastic IT infrastructure that optimises their business model.
As Yohan Kim, Chief Operating Officer at RFA, said when the firm unveiled the Multi-Cloud platform on 31 August 2016: “The release of the Multi-Cloud platform will provide clients at all stages – from start-ups to established, global firms – with the best of both worlds when it comes to the cloud: lowered costs and increased flexibility, while still providing the highest level of security and control.”
Both large fund managers and start-ups are embracing the potential of the cloud and understand the benefit to having access to data and applications in an instant, whilst on the move. Asher says that the Multi-Cloud gives larger institutions “a clear transition into the future”.
“At some point, public cloud adoption will reach critical mass in the alternative asset management space and we see that as the future. As such, the RFA Multi-Cloud offers a clear path to get there, in terms of not only technology but also budget,” says Asher.
For smaller fund managers, they are trying to run leaner and meaner businesses, building a performance track record using the least amount of technology expenditure. Asher says that the public cloud component works well “as we are able to leverage the cost advantages of large-scale resource pooling offered by vendors like Amazon and Microsoft; the model enables substantial storage capacity expansion for a fee that no medium sized service provider can compete with.
“At the same time, what was missing with the public cloud was a security tier that ensures the cloud solutions being considered were compliant with SEC regulation, UK and European regulation and so on,” explains Asher.
The ability to scale cloud services in line with one’s business needs is an attractive proposition for any financial institution. If a fund manager has operations in Europe and Asia where RFA might not have data centres, RFA will now be able to extend the cloud platform by launching a secure data centre on, say, AWS and connect it with the same level of security provided in the RFA private cloud.
Such is the pace of technology change that public cloud adoption has the potential to change the hedge fund operating model going forward. Djukic is slightly more diplomatic. As he says: “I don’t think we are changing it but we are definitely responding to the market drivers; overheads and costs. The reality is, managers are finding it increasingly difficult to cover them as their management fees come under continued pressure. They need to come up with new ways to operate their businesses at a lower price point and if they need to tap in to a new market in a month’s time, or even a year’s time, they want the flexibility to pivot as and when necessary.”
Asked what the next cloud platform trend could be, Misra offers the following concluding remark: “I think in the next couple of years one trend I expect to see is more vendors offering cloud services that are service-focused, like Navatar group. Vendors offering cloud solutions are still tech-oriented today and less focused on how to make the life easier and secure for fund managers so they can focus more on growing their businesses.”