Editor’s note: As today’s investment markets are largely electronic operations, hedge funds and investment managers must rely more than ever on technology. We spoke with Chris Grandi, founder and CEO of cloud IaaS provider Abacus Group about the cloud trends in this financial services segment. He explains why many hedge funds are optimizing their operations by turning to an outsourced solution.
SandHill.com: Please describe the hedge fund market’s pain points when it comes to reliance on technology.
Chris Grandi: First of all, although they rely tremendously on technology, they really don’t want to understand or manage technology. So they outsource the delivery of technology and corresponding services to firms like Abacus. I founded Abacus about five years ago when the hedge fund space was going through an inflection point of not wanting to own and maintain everything on site. It was a convoluted distributed IT network, which is very difficult to manage.
Hedge funds are probably the most demanding clients from a service perspective. They run billions of dollars and make decisions and trades that can affect P&Ls and returns by millions of dollars in literally a minute. Their demand for good service is the highest that I’ve ever seen. And that’s a pain point that is not going away; it will continue to be so.
Also, the markets are largely electronic now. People used to get their information over the telephone by calling investment banks or other trade desks. That still happens. But a lot of the information comes real time electronically, not only through pricing feeds or marked data feeds, but also over the Internet. So the fundamental nature of how hedge funds run from a workload perspective is certainly changing, and they are leaning much more on technology than they ever did before.
SandHill.com: When you founded Abacus, did you have a background in hedge funds? How familiar were you with the pain points?
Chris Grandi: I was very familiar because I had spent the prior eight years as the president of Edge Capital Integration (Eze Castle Integration), which was the market leader in providing IT services in the hedge fund space.
SandHill.com: What comments have you heard from hedge funds during the past 12 months regarding their challenges that are not well addressed?
Chris Grandi: There is a magnifying glass on security in the hedge fund space. Certainly there is more and more news about security breaches and hacker environments. Realistically a hedge fund manager’s business is wholly reliant on what their process is and what their algorithm is. They need absolute reassurance that, from a security standpoint, everything that they are doing and all the data that they are working on is absolutely protected.
With our clients, we spend a significant amount of time dealing with due diligence with their investors to provide them a better understanding of how cloud environments are truly secure and how they are more secure than running all of the equipment out of their office. That has really been a learning process, which kicked off about 12 months ago.
I don’t think that conversation about cloud security will ever end. In my opinion, security will always be a challenge in technology because ultimately you can create parameters and build a better mousetrap or firewall or whatever device you use to improve security, but ultimately people do figure out a way to get around security.
SandHill.com: So the hedge funds are more willing now to adopt a cloud-based service because it’s more secure than what they can do internally?
Chris Grandi: Exactly. And almost all security breaches that people have been aware of over the past five years have been physical in nature, not electronic. Someone takes a server or someone loses a back-up tape.
At Abacus, our data centers are manned 24/7. And we have all the certifications (SAS70, etc.) and use multiple biometric scans that scan eyes or thumbprints. You can’t get to our equipment unless you pass through all these checks. And there are only a minimal number of people who can get into the equipment. The cloud has removed that on-premises security challenge that hedge funds used to have.
SandHill.com: How is your solution unique compared to others in the market?
Chris Grandi: Because this is a cloud-based model, the technology is always evaluated on uptime resiliency, meaning how backed up it is and whether there are appropriate recovery solutions as well as certifications. Every technology provider will say they’re great, but ultimately how do you prove it? You prove it through uptime, through proof of multiple data centers and the architecture to support an overall technology service if there were a failure point in one data center. And more important than that, getting the SAS70 certification, and SSE16, the new one in this space, is really the most common benchmark to determine or evaluate whether the technology provider is really providing industry-standard and excellent technology to hedge funds. We look at those criteria as how we differentiate ourselves from our competitors.
SandHill.com: What are the top criteria that your potential customers are looking for in a provider these days?
Chris Grandi: This is a unique space. Ultimately hedge funds evaluate providers on service. You could have the greatest technology, but ultimately they want to know the person who shows up in their office is credible, has the domain experience and will be responsive.
The people who make the decisions at hedge funds are not typical general managers that evaluate enterprise software. They don’t do in-depth analysis and research and look at Gartner reports.
When they are getting ready to make a technical decision, they call five colleagues who are equivalent positions in other hedge funds and ask what they did at those funds.
This creates a little bit of a marketing challenge for solution providers because you can’t pay for that type of marketing. However, if you provide good service and hire and train the individuals to over-service clients, when that call goes out to the five hedge fund colleagues, it’s going to come back positive. So we invest in having the best people and only hire experienced people because we know that service is the number-one criteria on how we’ll be compared to competitors.
SandHill.com: Since this is an outsourcing relationship, is there anything that the customer needs to do to make sure that the relationship goes well over time?
Chris Grandi: The nice thing about hedge funds not knowing a lot about technology is they make decisions very, very quickly. Sometimes they can make a decision in 24 hours. You don’t see that in enterprise software involving corporate IT decisions. Once they make that decision, their expectation is essentially that the IT management of their business is now taken care of because we’re hosting everything in our private cloud.
Almost immediately they start leaning on us almost as if we were an internal resource as far as anything having to do with technology. What are the mobile devices we should use? What are the management systems we should look at? Are there other systems out there to help us manage risk more? These are all things that we’re knowledgeable about, but we’re not in the business of providing. But they essentially lean on us for everything regarding technology.
SandHill.com: So you become a trusted advisor.
Chris Grandi: Yes. Ultimately this is a game of trust. I tell all my guys, we are in the business of selling trust. Our clients don’t want to understand technology, so they have to trust that not only are we operating all of our technology and services in the most effective manner that always will be up, but we also have real knowledge and they can lean on us for technology issues.
SandHill.com: Do you think the way the software industry addresses the hedge fund challenges will change over the next two to three years?
Chris Grandi: Hedge funds move slowly when it comes to technology. And they aren’t anywhere near adopting social media and crowdsourcing. They like things to move up the curve and be tested for at least five years, and then they will adopt those technologies. In a time period of two to three years, there will be evolution and better services and better software; but I don’t think that there will be any inflection point similar to what we’ve seen in the past two years. In the past 24 months there has been a wholesale movement of the international hedge fund space changing their technology model, getting rid of all the internal infrastructure and putting everything in a cloud environment.
I think that the security concerns around the fact that the public clouds like AWS have gone down for multiple days is preventing a movement in that direction right now. But in the next two to three years we’ll see much more movement toward public cloud.
Four or five years from now, I think that technology in the hedge fund space will turn on its side again and there will be a better solution out there. But not in the next two to three years.
And there will be some solutions where some of the technology is run out of the cloud and some is still run out of the office. Particularly for those funds that are much more resource intensive or utilize proprietary quantitative algorithms to make investment decisions, there will always be a desire to keep some component of their fund on site. But even though everything runs in their office, it still will be replicated into a cloud environment from a redundancy standpoint.
Besides the security issues around the cloud, are there any mindsets or other hindrances among hedge funds that cause them to hesitate about moving to an outsourced solution?
Chris Grandi: The biggest pitfall we see is the discomfort around giving up an element of control and giving it to a third-party data center that they don’t own or control. They are getting over the hurdle because the economics are greater because they are going to start saving money since they pay only for computing resources that they use. So as they expand, they pay for it. And if they contract, which does happen in the hedge fund space, they cut their resources down. So the economics of the money that they pay truly match the business.
SandHill.com: What about disaster recovery? That should be a no-brainer decision when it comes to outsourcing.
Chris Grandi: That’s a very big topic of conversation these days. During Hurricane Sandy, New York hedge funds were dislocated and without IT because of power outages; so business was very challenging. That is driving the market to look at providers’ disaster recovery plans and how they replicate everything.
About 20 hedge funds are now clients of ours because of the risks that were highlighted in Hurricane Sandy; they realized they did not have adequate backup for their business and couldn’t trade actively, which affected their P&L.
Chris Grandi is founder and CEO of Abacus Group. Chris is responsible for Corporate Strategy, Finance and Operations. Chris was previously president of Eze Castle Integration where he helped grow the company from 30 employees to over 300 employees servicing more than 450 hedge fund clients. Prior to this, Chris co-founded and later sold Dynamic Transactions, Inc., which developed Internet payment software for commercial banks. Prior to this, Chris worked in the Fixed Income, Currency and Commodities division at Goldman Sachs in New York.
Kathleen Goolsby is managing editor of SandHill.com.