Hedge funds and other alternative investment managers are looking to cloud computing to improve operational efficiency and reduce information technology infrastructure expenses.
Private Cloud provides several advantages for hedge funds. It provides the flexibility and scalability they desire, while satisfying their security and regulatory concerns. In addition, when done correctly, the Cloud also increases speed of deployment of new applications, as well as simplifies IT management and support.
How do you go about setting up a private Cloud for your hedge fund? All three major cloud service providers offer a private version of their private Cloud product. Amazon offers the Amazon Virtual Private Cloud, Google offers the Google Cloud Platform’s Virtual Private Cloud, and Microsoft Azure offers the Virtual Network.
You might be asking, how do these “private” clouds work? All of these products work in similar ways. The basic concept is that they provide an isolated and highly-secure environment in a virtual network that you define. You have complete control over all virtual network environments, including selection of your own IP address range, creation of subnets, and configuration of route tables and network gateways.
All the networking configurations can be controlled via a GUI based management system provided by the Cloud providers. How to set up these clouds is out of scope of this article, but your current IT support person can set this up for you on the service provider of your choice. The best part is that you do not have to move all your network and resources to the Cloud at once. You can perform the migration on an incremental basis, as you and your team get more comfortable with using the private Cloud.
Now, let’s get to the main point of this article. For hedge funds interested in how they can leverage the private Cloud, I will be describing five use cases where hedge funds can leverage the private Cloud.
Use Case #1 – Running Batch & Real-time Calculations
One of the most interesting use cases for the private Cloud is utilizing the on-demand, flexible and scalable computing power provided by the private Cloud for highly intensive calculations and tasks. Hedge funds can perform both batch and real-time calculations in their preferred environment (operating system, database, etc.).
These calculations could include quantitative analytics, investment strategies, backtesting, risk analysis, P/L calculations, portfolio NAV calculations, and anything reporting related. When setup correctly, the hedge fund can commission the private Cloud resources on an as-needed basis, while retaining control over their data and security. For example, you could run the end-of-day calculations and reporting after the market close, and only pay for the time that you used the private Cloud to run the end-of-day processes. Similarly, you could commission your application server in the private Cloud once a month for the end-of-month calculations and reporting jobs.
In the front-office, investment managers can leverage the private Cloud to perform real-time pricing, P/L calculations, and what-if scenario analysis before the market open and during the day as they trade. From the middle-back office perspective, risk managers can use the private Cloud for valuation and risk management calculation, including VAR and credit risk across all of the desks.
Use Case #2 – Applications Monitoring & Performance Analytics
Application monitoring on the Cloud is different from monitoring IT infrastructures and application servers within your hedge fund. In fact, most major Cloud providers, including AWS and Google Cloud, provide in-house cloud monitoring tools that provide in-depth information to help you gain insights into your cloud environments and applications.
Using services such as AWS X-Ray, which is a distributed tracing system, hedge funds can monitor, analyze and debug production applications. These applications and services could range from a simple three-tier architecture to more complex ones using the microservice architecture. Developing with the use of the AWS X-Ray API, hedge funds could write their own custom application monitoring services that are tailored to their exact needs. Google Cloud provides a solution called Stackdriver Monitoring, which provides visibility into the performance, uptime, and overall health of cloud-powered applications. The Stackdriver Monitoring solution can be used to monitor applications running on the Google Cloud, as well as on AWS.
Most Cloud providers offer in-house, GUI-based application monitoring solutions, where the IT administrator or the devops team do not need direct access to the server itself, and the monitoring can be done using the Cloud providers own interface. Most Cloud providers, including AWS, Google Cloud, and Microsoft Azure, provide off-the-shelf monitoring services. For more complex applications, they provide frameworks, which can be used to develop your own application monitoring engines based on your specific needs.
Use Case #3 – Deploying Machine Learning Applications
Hedge funds looking to utilize machine learning (ML) algorithms can get a head start by using services like Amazon Machine Learning, which is part of the AWS Cloud. Amazon Machine Learning provides visualization tools and wizards that guide you through the process of creating ML models without having to learn complex algorithms and technology. Hedge funds can use this cloud based service to get up and running on their own predictive analytics in matter of hours compared to days for when starting from scratch.
On the data science front, the two leading Cloud providers, AWS and Google Cloud offer a robust set of services and solutions. Hedge funds can leverage the Google Cloud Machine Learning Engine and Google TensorFlow for machine learning and deep learning algorithms. Google Cloud offers specific framework to perform financial time series based calculations. This framework supports multiple types of datasets from exchange data to social media data, as well as news based datasets.
In addition to Amazon QuickSight for data analytics, AWS offers support for all major machine learning frameworks, including TensorFlow, Caffe2, and Apache MXNet, for hedge funds looking to develop and enhance their data science based models.
Use Case #4 – Data Management, Backup & Disaster Recovery
Data management is an integral part of hedge funds, especially ones using quantitative and big data analytics as part of their investment strategies. According to a recent Ernst & Young survey, nearly 50% of hedge fund managers are using non-traditional data like social media data, private company data, supply chain, and other alternative data sources to enhance their investment strategies.
Hedge funds and other alternative investment funds with such requirements can utilize the cloud to store, analyze, and even archive this data on a scalable as needed basis. For example, AWS offers a compressive set of Big Data Analytic Frameworks, including Amazon S3, Amazon EMR, Amazon Elasticsearch Service, Amazon Athena.
Similarly, Google Cloud offers Google Storage, Google Bigtable, Google Datastore, and Google Persistent. Similarly, Microsoft Azure offers Azure Data warehouse, Azure Big data and analytics, Azure Disaster recovery, Azure Backup and archive products for similar needs.
Instead of investing thousands of dollars on expensive servers and IT infrastructure, hedge funds can leverage these cloud solutions for their data management, analytics, and storage needs on an on-demand basis.
Use Case #5 – Simplifying IT Infrastructure Requirements
Instead of maintaining your own email server, network drives, and office productivity suites like MS Office, more hedge funds are moving these operations to the Cloud. There are two big players in the market Google’s G Suite and MS Office 365. Hedge funds that are already using MS Office will have an easy transition to their Cloud based offering.
These online software suites are available anywhere, so you can access them at work, and also at home or any other location. You do not have to maintain any servers or worry about software updates, as they are maintained by the service providers. They have predictable costs, as most of these services charge per user, per month. Both of these providers offer support for migration, on a continuing basis, so you do not need your own IT staff to support your basic email, office productivity suites, etc. Making this move will not only eliminate a big part of your IT infrastructure, it will also save you any down time that you might have while fixing errors or upgrading your own email servers.
In conclusion, Cloud is not an all or nothing option. Hedge funds can move some of the operations to the Cloud, but decide to keep some in-house. Also, having an offsite backup, and disaster recovery mechanism is good news in attracting new investors and making current investors happy. Outsourcing IT to the cloud can help the hedge fund focus on their core competency, which is making money.