Clouds gather over sceptical IT departments

Software vendors are clearly moving to deliver services via the cloud, but hedge funds are sceptical – and risk being left behind

At Citco, we meet yearly with our top vendors in Silicon Valley to understand their product strategies. The tone in these meetings over the past couple of years has been moving towards delivering services via cloud computing. From our discussions, we see a trend where some major firms are indicating that their software may move entirely to the cloud within the next five years.

One software vendor has already said to us that they will no longer serve us if we do not accept cloud-based updates, giving us no choice but to move to their online service. This is the first such case we have encountered, but it seems likely that hedge fund managers will soon start facing similar ‘no choice’ scenarios.

Office 365, Salesforce, NetSuite, Intacct and PeopleSoft already have cloud-based software. And yet, in the past two years, we have seen the hedge fund sector remain steadfastly sceptical.

When Citco hosted a CTO dinner two years ago, about half of the attendees said they had no intention of adopting cloud-based solutions. In 2015 and 2016, at similar events, the proportion of CTOs rejecting the concept of the cloud has remained the same. Admittedly, these are small samples, but they seem representative of the industry as a whole.

Being left behind

The cloud-based ‘software-as-a-service’ business model offers software vendors long-term, sustainable revenues, and with analysts that research the technology industry judging software firms partly on how quickly they adapt, it’s a move that almost all vendors will make in the near future. Hedge fund managers that continue to resist the software industry’s evolution may find themselves left behind and scrambling to make hasty upgrades.

One common reason that hedge fund firms give for preferring ‘on premises’ software is their belief that it is more secure than cloud-based alternatives. Ironically, software vendors argue that security is actually an area in which cloud-based solutions have a major advantage in the medium and long term. The major cloud service providers have very significant security budgets, and their cloud-based software will have far better security than most hedge fund managers can afford.

For those managers that opt out of the cloud and manage their own security, Gartner, the technology research company, has a stark warning. In a recent report, it warns that there is likely to be such a big increase in security spending that it will have an impact across other areas of businesses. “The demand for security skills and the relative paucity of their availability suggest that the cost for skilled personnel may rise, and this may have to be funded by efficiency improvements in other areas of security, such as improvements in technology and more competitive commercial arrangements,” it writes in research.

Advantages of the cloud

At Citco, our moves towards cloud-based soft-ware are already showing huge promise. For example, we are conducting proofs of concept that combine cloud infrastructure with new microservices software architectures. The result is a tremendous increase in processing speed.

We believe it is time for hedge fund CTOs to start planning for the move to cloud-based solutions. If they do not, it’s likely their security spending will soar at a time when the industry’s profit margins are already under pressure – and they will risk missing out on considerable improvements in security and day-to-day operational performance.

9th September 2016

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Albert Bauer

Albert Bauer

Managing Director, Citco Fund Services (USA) Inc.

T+1 (212) 401 9629