Hedge Funds Head into the Cloud

There was an article in Wall Street & Technology the other day about hedge funds increasingly turning to cloud-based services for various functions instead of building out their own IT systems. The article focuses on the cloud-ward migration of back-office functions, but we see it happening in the front and middle office as well. Just in the past few weeks we announced three new Solace customers that are building cloud-based businesses around their unique technical expertise:

• Fluent Trade Technologies offers fast and flexible electronic trading services.

• Pico Quantitative Trading offers low-latency trading and risk management services.

• Connectivity in a Box provides FIX connectivity as a managed service.

Each chose Solace because we offered them ultra-fast performance, predictable latency, headache-free management, rock-solid reliability and multi-tenant capabilities — all key attributes of any cloud-based service. Starting with a mature, full featured infrastructure means these cloud service companies can spend more minutes focused on making their trading services better instead of coding, configuring, tuning or operating software-based middleware. That means they get them to market faster now and them benefit from improvements to the Solace platform over time.

Working for Alpha is Back in Vogue

Just five years ago it would have been difficult to predict that hedge funds would be moving this quickly towards the cloud. I believe you can trace the reasons to the hype cycle of widespread high frequency trading. In 2008 ultra-low latency was the buzz and many hedge funds sank lots of money chasing speed-based statistical arbitrage trading. But the problem with speed as a trading strategy is that there can only be one absolute fastest. And even if you were fastest on one day, a hundred other firms were working to leapfrog you the next.

Today, a small number of firms dominate this kind of high frequency trading, and most other hedge funds have gone back to generating alpha the old fashioned way — through differentiated trading, hedging, or pairing strategies. When it comes time to get in or out of the market, they still want to be very fast, but the chances are very low that two hedge funds will be chasing identical strategies against identical sources of liquidity, so being the absolute fastest is far less important. The quality of their ideas determine their returns, not just the raw speed of their technology.

And the Circle Goes Round

Just like the cloud providers use commercial middleware technology to save them time and money, it makes sense that hedge funds are looking to leverage experts in trading technology (rather than aim to be good at that themselves) for the same reasons. It’s a smart way to divide labor that lets each company focus on what they are best at for the benefit of all.