Understanding Cloud Computing: Benefits & Challenges For Investment Firms

Nov 30 2010 | 4:51pm ET

By Bob Guilbert, Managing Director, Eze Castle Integration -- With IT budgets tighter over the past two years, many hedge fund and investment firms have had to make changes to their businesses.  Staff, systems and budgets continue to be closely monitored in an effort to reduce costs and increase efficiencies.

Investment firms, more than many businesses, rely on premier technology for swift trade execution, secure data protection and much more.  But firms are still looking for the right balance between reducing the IT budget and maintaining robust and efficient systems to support performance needs.  Beyond existing firms, new start-ups are entering an investor market that expects them to have sophisticated processes and operations on day one.  How can these firms have enterprise-level technology on a small operating budget?

Cloud computing is one solution, and it’s gaining a lot of popularity within the industry. In this article, we’ll examine both the key benefits and challenges associated with cloud computing, as well as dive deeper into the various cloud environments that firms can use.

Cloud Computing Defined

Despite its growing adoption within the industry, cloud computing remains a largely misunderstood concept for fund managers. In the simplest terms, cloud computing is when a service or software application is hosted in a Web-based repository – the “cloud.”  The service is often hosted by a third-party provider, who then provides access to that service to users on an on-demand basis.  A fund’s data and applications are fully hosted, alleviating the need to purchase and maintain costly infrastructure in-house.

The cloud can support front-, middle- and back-office functions – everything from business applications and client relationship management systems to data management solutions and accounting systems.  Cloud computing has a number of benefits for investment firms, notably a low infrastructure investment, increased flexibility and reduced maintenance.

Benefits

Cost-Savings
There is no question that migrating to a cloud-computing model can render significant cost savings for an investment firm.  Rather than purchasing costly infrastructure and building out their own communications room, firms can outsource that infrastructure to a third-party and manage all of their data and applications from a simple Web address on the Internet.  Start-up firms can particularly benefit from this model, as they typically do not have a surplus of upfront capital to invest in their own infrastructures or IT staffs.

Scalable & Flexible
One of the greatest benefits to cloud computing is that firms only need to pay for the resources and capabilities they need. In a traditional infrastructure model, firms must invest in advanced servers and storage devices that generally come at fixed costs.  Cloud computing is uniquely flexible and scalable, operating on a utility basis and allowing firms to pay as they go and only for the resources they will use.

Because cloud computing is a virtualized solution, there are other distinct advantages not offered by traditional server models.  Space, storage and RAM are quick and easy to add. There is no need to wait for quotes to be drafted and equipment to be ordered and shipped.  Instead of taking days, a firm’s needs can be fulfilled in a matter of hours. 

Cloud computing also supports multi-tenancy, which allows for increased utilization and efficiency. While some may express concern in regards to a multi-tenant cloud infrastructure, a properly configured cloud will utilize software segregation at the storage, switch, server and firewall levels to ensure all data is secure and fully segmented.

Green Benefits
Cloud computing – using the Internet as a gateway to technology – has a significant environmental benefit.  The resources and energy needed to maintain and manage a traditional communications room are considerable.  Power, cooling and basic energy supply equipment must be at peak performance at all times in order to facilitate maximum uptime for hedge funds and investment firms.  With cloud computing, firms don’t need to host internal equipment, thereby saving on energy costs.  Additionally, third-party providers often have custom data centers specifically designed for better energy efficiency.

Security & Performance Concerns

Despite its many advantages, cloud computing continues to meet some resistance, particularly by financial services firms that are concerned with data security and performance.  Some firms also indicate they are reluctant to migrate to virtualized platforms because they don’t fully understand the systems and benefits.

Privacy and security concerns are common among hedge funds, given the sensitivity of their data.  The idea of hosting this sensitive information on the Internet is not always a comfortable one.  Third parties who provide cloud services, however, are quick to point out that this model is just as secure as maintaining one’s own infrastructure, with comparable data protection measures, firewalls, security checkpoints and passwords.  Performance concerns, as well, are easily thwarted by third parties, who insist cloud computing is just as efficient and effective as non-Web-hosted systems.

What Type of Cloud is Right for You?

Cloud computing technology enables the sharing of resources in a way that dramatically simplifies infrastructure planning.  With the cloud, large pools of resources can be connected via private or public networks to provide a dynamically scalable infrastructure for application, data and file storage.  Firms can choose to deploy applications on public, private or hybrid clouds. 

Public Clouds
Public clouds are owned and operated by third-party service providers.  Customers benefit from economies of scale because infrastructure costs are spread across all users, thus allowing each individual client to operate on a low-cost, pay-as-you-go model.  Public cloud infrastructures are typically larger in scale than in-house enterprise clouds, which provide clients with seamless, on-demand scalability.  It is also important to note that all customers using public clouds share the same infrastructure pool with limited configuration, security protections, and available variances, as these factors are wholly managed and supported by the service provider.

Private Clouds
Private clouds are built exclusively for individual enterprises.  They allow firms to host applications in the cloud, while addressing concerns regarding data security and control.  There are two variations of private clouds:

  1. On-premise private cloud: Also known as an “internal cloud, this model is hosted within an organization’s own data center.  It provides a more standardized process and protection, but is often limited in size and scalability. This model is best for applications that require complete control and configurability of the infrastructure and security.
  2. Externally hosted private cloud: With this model, a third-party provider is responsible for hosting the cloud infrastructure. The service provider facilitates an exclusive cloud environment with full guarantee of privacy.  This format is recommended for organizations that prefer not to use a public cloud infrastructure due to the risks associated with the sharing of physical resources.

Hybrid Clouds
Hybrid clouds combine the advantages of both the public and private cloud models.  In a hybrid cloud, a firm can leverage third-party cloud providers in either a full or partial manner, increasing the flexibility of computing.  The hybrid cloud environment is also capable of providing an on-demand, externally provisioned scalability.  Augmenting a traditional private cloud with the resources of a public cloud can be a solution used to manage unexpected surges in workload.

Saying “Yes” to Cloud Computing

Each firm must rely on its own needs and resources in order to determine whether cloud computing is a good fit.  As we’ve outlined, there are a number of considerations of which to be mindful, including cost, efficiency and maintenance.  While cloud computing may be suitable for some firms, it may not be the best option for others.  Firms should assess their individual needs and determine the best strategy based on their current requirements.

About Bob Guilbert: With more than 20 years of IT experience, Bob Guilbert is responsible for leading all of Eze Castle Integration’s marketing, partnership and product development functions.  At Eze Castle Integration, Guilbert’s team runs a robust, scalable cloud infrastructure in multiple Tier III and Tier IV data centers.  The Eze Cloud infrastructure leverages best-of-breed technologies to deliver cost-effective infrastructure-as-a-service-powered solutions to the investment industry.


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