IT For Hedge Funds: Why, When & What to Outsource
Open Platform: A Hedge Fund’s Guide to IT
by Bart McDonough, CEO, Agio
If you are the CTO, CIO or senior IT manager of a hedge fund, you have, or most likely will consider, outsourcing or upgrading your outsourced technology. The hedge fund space is somewhat unique in terms of IT provisioning, as funds can have large revenues, require critical applications, and yet have small physical IT footprints.
Hedge funds are increasingly embracing the IT outsourcing model because of the benefits it offers, including an intelligent help desk, desktop management, a highly available infrastructure and application environment, maintained data security and integrity, defined and predictable service costs, and comprehensive management policies. And as IT outsourcing gains wider acceptance in the hedge fund community, outsourcing this function continues to evolve—new delivery technologies are emerging, network bandwidth continues to become more accessible, and innovative charging models are developing.
While the decision to outsource is a difficult one, deciding what to outsource and with whom to partner can be just as daunting. There are a number of factors to consider when making the decision.
There is no rule of thumb to define if you should outsource. However, it is worth remembering that you want to be in the trading business, not the IT business. The decision can often be aligned with other operational areas of your business.
For example, if you need to outsource your human resources and payroll function, then chances are you need to do the same for your IT. Of course there may be other factors involved in the decision to outsource such as an existing, malfunctioning internal IT function, or simply demands that have grown too large for your existing infrastructure. When delivered well, an IT outsourced service will allow you to focus on your core business without the headache and cost of managing technical systems, technical problems and technical people.
When to Outsource
There may be any number of drivers to outsourcing your IT. However, in many cases it comes down to a number of common factors around your internal IT function: consistent failure to deliver the service levels you require; the inability to meet the growing requirements of the business; a lack of market knowledge around new IT initiatives; constant resourcing issues around covering rotas, sickness and vacations and the delivery of new projects; failure to retain skilled staff; and headcount limitations around the recruitment of new permanent staff members.
What to Outsource
Once you have made the decision to outsource, you must be clear about which services you plan to have provided externally. Each business is different; however, a common approach is to start by outsourcing standard IT services such as help desk, desktop, infrastructure and datacenter management, while retaining business-specific functions in-house such as application management.
When you gain more confidence in your provider, you can always increase the scope of services they provide. But whatever you decide to outsource, be clear and make it contractual.
Choosing Your Provider
This is quite often the toughest part of the decision. You need to be sure that you pick a provider who can keep up your systems, protect your data, and scale to your business growth. Quite simply, this means effective due diligence. And that due diligence needs to cover all the bases. A managed IT service provider specializing in hedge funds knows the intricacies of this environment, how to maintain uptime on your dealing apps, protect your trading algorithms, and scale your IT capacity to meet your growth.
Financial and Legal Standing
IT outsourcing agreements can last for several years. So it is critical that your potential provider has the financial stability to engage in a multi-year agreement. Managed services generally offer steady, recurring revenues for suppliers, so look for unexplained peaks and troughs in your provider’s finances. At a legal level, you should also know that there is no outstanding litigation. The root cause of any such litigation is usually either a failure to deliver or a breakdown in relationship—either is enough reason to steer clear.
Track Record and References
A good service provider will have good client references. A reference is the best way to get a feel for the quality of service you can expect. Start with checking some service reports—ideally around the mid-point of the contract term. Find out how the supplier-client relationship works, how the supplier management team engages, and how the supplier handles changes at short notices.
A primary hedge fund objective is obviously to increase the value of assets under management. This has a direct impact upon the provisioning of your IT services. If your IT function cannot flex, a fund’s growth potential could be prematurely restricted. This is less likely to be an issue for an outsourcer that should be proficient in the design, building and operation of new services.
The size of your service provider is important—but big is not always best. Your instinct may be to go with a large, established provider that may seem like a safe bet but you may not get the flexible, customizable service you need. However, it should be big enough to be a full-service provider covering the basics of help desk, infrastructure and applications capability, 24×7 operations, and multi-site presence.
A good managed service is usually based on a well-established set of processes and procedures. It is difficult to measure the maturity of a service provider on the surface, so you need to see evidence of some indicators: Does your provider have a catalogue of standard, pre-priced items; detailed operational procedures and quality checks and audits; and policies for business continuity planning and disaster recovery (BCP/DR), information security, risk management and exit management?
Does it have a documented approach to retaining and developing staff; an outline of how your services would be migrated while maintaining your system integrity; and finally, an investment in systems management and service reporting tool-sets to demonstrate that your systems will be proactively managed and maintained?
One of the biggest technological advances in the financial services industry is cloud computing. This technology is having a tremendous impact upon the delivery of IT services in financial services, especially in the hedge fund sector. Cloud computing will continue to grow rapidly over the next few years as portfolios expand.
Benefits include reduced capital expenditures, unlimited capacity, and services are typically charged on a utility basis. You might seek reassurance that shared cloud environments produce sufficient security. The right provider should be able to give you the confidence that your data is secure.
You should be aware of what you pay for your service in comparison to the market. The best way to ensure that the price you are paying is fair is to undertake a benchmark exercise. This simply means using a research group to check out the going rate for the type of service or services you need.
Knowledge of Your Business
Again, delivering hedge fund IT services is not the same as delivering generic IT services. A competent provider has to know the trading business, your trading applications and what data to secure.
This helps to offset the risk of the loss of institutional knowledge in the event that internal staff leaves the business. Moreover, from a security perspective, it should be no surprise that most threats take place within your organization. Your IT provider should be able to answer the question, “Which is more important—endless firewall penetration tests, or effective data loss software that prevents employees from accessing and removing your trading algorithms?”
The outsourcing process can be complex yet rewarding. Choosing the right services to outsource, the right service model, and the right provider is not a simple process. However, choose well and outsourced IT can be a great enabler for your business.