Historically, hedge funds were known as being risk averse when it came to adopting new systems and technologies. However, the latest generation of emerging managers are increasingly embracing technology in the form of automation and process outsourcing in their quest for ‘operational alpha’. Whilst this is very much true of quantitative managers, it also extends to those discretionary managers that have begun to utilize quantitative processes in order to gain efficiencies in areas such as investment idea sourcing, operations and compliance. This openness also extends to the adoption of public cloud platforms, applying to both the infrastructure and service of the cloud, as well as the many applications available.
We see five major benefits for hedge funds embracing the public cloud.
1. Improved Productivity
Public cloud platforms can help hedge funds augment productivity by providing a platform, such as Microsoft O365’s Flow, for better—meaning faster, more integrated and automated—as business processes. Overall, the hedge fund sector is using the cloud to quickly adapt a wide variety of analytical tools to identify processes for improvement via these platforms.
Since hedge funds generally have quite tight head counts, this data-driven approach can really help boost productivity. When business process activities are optimized based on an objective framework rather than “feel”, it frees up valuable time for hedge fund employees in the front- and mid-office to focus on more high-value added work, for example, on research, which has a higher benefit to the investment management company. The use of different software service applications lends itself well to this type of optimization.
2. Better Analytics
Looking across the entire investment business landscape: every manager wants to improve research analytics. What this means for hedge funds is two-fold. First, the public cloud offers the capacity to improve portfolio analysis of the different kinds of factors that are affecting portfolio performance. Second, the public cloud allows hedge funds to perform deeper analytics, including being able to plug more data into research activities.
Firms like Two Sigma and Renaissance are highly specialized with regards to their use of data analytics. But now virtually every hedge fund needs to crunch much more data. They may not do it on the level of these mega quant specialists, but even a typical ‘fundamentals’ focused hedge fund will be using much more enhanced analytics than what they used to do with spreadsheets. Public cloud-native services and applications are rapid enablers of this.
3. Minimize Capital Spending
Every hedge fund runs several different applications for trading, risk management, shadow accounting, portfolio analysis and more. These systems tend to evolve over time, while the investment strategies and the trading system a hedge fund uses are also prone to continual change. This is a notable feature of today’s market.
In this sort of operating environment, the public cloud platform lets hedge funds minimize capital outlays in sunk costs on IT infrastructure. Using the public cloud can deliver both a lower initial capital expenditure on technology and also give a hedge fund management company more control over ongoing costs as well as a lot more freedom to scale up or down as the business changes.
4. Competitive Advantage
It is particularly interesting how cloud technology is rapidly evolving remote access to trading systems. The public cloud can help hedge funds gain a sustainable competitive advantage over peers. Using public cloud applications allows hedge funds to experiment with an expanding array of software tools, including machine learning, quantitative analytics and algorithmic trading. This can help a hedge fund adapt rapidly to market changes and client demands.
The competitive advantage is underscored by the scale and speed of innovation in the fintech space. New apps are being developed every day, and the ability of a hedge fund to use the public cloud to innovate and migrate to new processes offers real opportunities for competitive differentiation.
5. Elevated Cyber Security
It is no secret that hedge funds are attractive targets for cyber-attacks. Investment security-pacific elements of public cloud platforms, as well as third-party products designed to protect public cloud infrastructure, has substantially enhanced the capability and availability of security solutions to hedge funds.
From email and data security to protection from intrusion, public cloud-interfacing applications are providing more targeted and efficient cyber security oversight. Software-based and ML-driven solutions simplify managed detection and security for funds with multiple and diverse endpoints simplifies hedge funds’ security posture, and also provides more robust and intuitive cyber protections for cloud-based applications.
We believe the public cloud platform is a powerful differentiator for any hedge fund business. As the development cycle of technology and process innovation continues to speed up, investment managers need the capabilities and rapid adaptability that public cloud infrastructure provides.
The entrepreneurial imperative that drives hedge funds has led to them to embrace technology and become much less conservative in operating process adaption than, say, private equity firms. As relatively earlier adopters of public cloud platforms, hedge funds have understood the benefits of being able to massively scale up capacity when it’s required and scale down when it’s not.
With ‘alpha’ increasingly tough to generate, we expect hedge funds will continue to lead other financial services sub-sectors in process innovation. The firms that do this best well be those that make the best use of the business development opportunities presented by public cloud platforms.
Article produced in collaboration with sponsorship from Microsoft.