20
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Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
20
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Citi Prime Finance’s 2011 IT Trends & Benchmarks Survey
Sometimes, however, a foundational shift in technology occurs
which, in turn, warrants all hedge fund managers to take a step
back and reconsider their approach. The emergence of off-
premises or cloud technologies appears to be moving the hedge
fund industry toward such a point of refection. Older models
may persist, but the emerging model that we have dubbed
“Hedge Fund 3.0” provides a radically different approach to
realizing a hedge fund’s core infrastructure. This new model
could have signifcant beneft not only for newmanagers looking
to establish their foundational platform, but for the broader
universe of managers as well.
Over the past few years, in both the U.S. and the UK, a handful
of infrastructure frms that focused almost exclusively on the
hedge fund industry have become managed service providers.
This term refers to their go-to-market model. Rather than
building and supporting proprietary data centers for a hedge
fund manager within their offces or maintaining that hedge
fund’s equipment in an external facility, these new breed of
managed service providers instead provision their own rack
space and basically “rent” their hardware to clients as a service.
In turn, this has driven traditional IT providers to offer hosted
environments as well.
The change in approach is being matched by a change in the
revenue model. These new infrastructure frms have eschewed
the traditional “time and materials” approach for engaging their
clients, and instead are moving to a new “infrastructure as a
service” model with fxed-fee contracts.
In the emerging Hedge Fund 3.0 model, these managed service
providers are being contracted by hedge funds to host either
their production or disaster recovery environments (or both).
They are also providing a fxed-cost service wherein the hedge
fund manager can opt to host their software on this rented
infrastructure as well. This compares to earlier models where
the hedge fund manager either had such software installed on
site or where they contracted with the sponsoring vendor to
host that system on their behalf.
We will go into more depth about Hedge Fund 3.0 later in this
section. To fully understand the beneft this newapproach offers,
however, we will frst explore the older models that exist in the
market. Remember, the majority of hedge funds in existence
today continue to ascribe to one of these older models, and it is
only newer-vintage funds that would be pursuing the emerging
Hedge Fund 3.0 approach.
Early Vintage Funds Rely on Locally Hosted
Data Centers
Chart 12 provides an overview of the three models we’ve
identifed to illustrate hedge funds’ infrastructure approach.
What immediately stands out is that while the “cloud” is a
relatively new buzzword in the industry, the use of off-premises
services has been an inherent part of the hedge fund industry
since the rise of internet technologies themselves.
As shown in the frst Hedge Fund 1.0 model in Chart 7, such
off-premises services may have only referred to data and
services being provided by the hedge fund’s prime broker and
fund administrator, but the concept of having key information
and services used by a manager hosted elsewhere was present
in all modern versions of hedge fund infrastructure.
Section 3: Hedge Fund 3.0: Leveraging Off-Premises Cloud Technology
The approach a hedge fund manager pursues in creating their core infrastructure (hardware, networks, data) is
very much tied to the prevailing technology available in the market at the time of their launch. As innovation
occurs, the options available to a manager change. The costs and complexity of replacing a manager’s
foundational hardware is substantial. Upgrades occur, but typically only at times when a major change in
capabilities is being contemplated or when a signifcant beneft can be realized by making such investment.
As such, the type of infrastructure a hedge fund manager possesses can very much provide a clue about
their vintage.
“You can tell when a frm started by how they do what
they’re doing.”
– General Manager & SVP of Sales and Marketing
for a leading Financial Software Provider