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Hedge Funds Increasingly Using Cloud For Back-End Computing

Hedge funds are increasingly adopting the cloud for the purposes of cost savings, and the shift to cloud can mean big business opportunities for cloud providers.

"I would say hedge funds' back office functions are going into the cloud right and left," says George Michaels, CEO of G2 FinTech in a phone interview. His experience offering tax calculation software services to hedge fund customers, available in servers or on the cloud, has shown that financial institutions are increasingly switching over to cloud based services, and their reservations about the cloud are quickly being chipped away.

Since much of the technology on Wall Street is older, outdated and costly to run, you can see where the cloud story is headed. Cloud, which offers both data storage and compute capacity, has the ability to change the way IT is budgeted and how it is managed.

Today, most large financial companies have data centers -- or many data centers -- filled with servers. These are expensive and require constant resources like power, cooling, real estate, and IT personnel to hold it all together. It's a burden for small and large companies alike, although obviously at different scales. Moving to the cloud can lower operational costs and for hedge funds that savings can directly translate to better returns and bonuses, so you know executives are keeping their eyes on these opportunities.

Underlying Trends

"We have this great service, and since we know cloud is catching on with our customer base, we made sure our offering is provided in that way," says Michaels. "So when they say we want to buy your product but don't have the server room, we can say no problem, we have cloud offerings too."

He adds that his relatively new clients are more eager to take on the cloud service option than those brought on more than a year ago. The tables are shifting, especially for the very small and extra large companies, who can lack space and resources for anything but cloud options.

"Our first two customers to take the cloud option were small firms that didn't have server rooms," he explains. "The larger companies that take the cloud option often do so because their IT departments have an involved procurement process." For example, it might take them one week to install, but they would also need 9 months to get the server. "So instead of that, we just pull the trigger and get them ready to go with cloud."

Secret Sauce

"We're seeing things like phone service in cloud, portfolio management software, risk management, and more," says Michaels. Yet there's still hesitation about deploying the front-office operations. "In the industry everyone thinks they have an advantage over the other's front end. You can hardly blame them for not wanting their secret sauce running in the cloud. What's more, their complex custom built services are technically very difficult to move over."

[Read more about improving cloud security and adoption in the financial industry: Nasdaq FinQloud Inks 19th Financial Services Client to learn more.]

Hedge fund executuves, you can argue, are among the most covert and are very conscious about not revealing any financial secrets. While cloud computing companies are working hard to assure customers of their high security and compliance, many of these firms are going to need more proof before moving their front end to the cloud. Michaels says this security detail has caused some mid-size firms to stick with servers despite the cost benefit from their cloud offering.

Is Cloud A Software Business Solution?

For companies like G2 FinTech, it doesn't really matter if their customers chooses server or cloud-based services, but the ability to offer cloud has helped to grow the business.

"We offer a software that is helping hedge funds and investors of hedge funds pay tax correctly," explains Micahels, whose clients range from hedge funds themselves, the brokers that cater to hedge funds, fund administrator firms, and big-name tax preparers comparable to Ernst & Young. "They're attracted to the product because of its efficiency, accuracy and cost savings but if I can give them a fourth reason to switch over [cloud based] it's all the better."

Suggesting the cloud offering alone can overshadow these other benefits, he adds, "the cloud option is nice, but don't forget these other things that represent improvement." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

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