Blind men & elephants
As the fund management industry continues its race to the bottom in 2013, managers are increasingly obliged to find new and innovative ways to cut costs. One target that may be looming large is the cost of in-house data storage, particularly given the increasingly viable and far cheaper cloud-based options.
While the cost of a single gigabyte of hard drive storage may have fallen from just over a million US dollars in 1980 to less than 10 cents today, the amount of information that is heading into storage is taking funds’ related annual costs into the millions.
The rise of international diversification combined with the recent waves of regulation and a rising demand for transparency have vastly increased the need to track assets, and store, analyse and report data. Security concerns are overriding, and the bigger the firm, the more important the security. As cloud-based data storage providers play to the increasingly frugal sentiments of fund managers globally, questions of security must be adequately addressed. Which is perhaps easier said than done.
Sovereign wealth funds (SWFs), for instance, which can pay tens of millions of dollars a year to run in-house silos, need to ensure that their data (a key asset to them) is stored in very specific places, all of which must be within the country. Some make it mandatory to hold all of their data within a single building. Here, the characteristic capacity for cloud-based services to be accessed from anywhere is a negative.
Nevertheless, as cloud-based service providers work to improve their technologies and inform the wider market of the viability of their services, and as fund managers seek to tighten belts further, a tipping point looms.
The main problem with cloud-based solutions is not that they lack appropriate levels of security; it is rather that their security levels are hard to quantify (though this also applies to in-house systems).
A recent conversation with a cloud-based service provider highlights the challenge they face in persuading SWFs that the technology they are offering is superior to that of their own.
“We don’t know if what we have is more or less secure than what they have. As such, we try to focus on what we are trying to achieve. Our encryption levels are among the highest on the market and twice a year we conduct penetration tests using consulting firms that hire skilled hackers. They will then report the weaknesses of the platform, and we show this information to our clients. Some have mentioned that this service appears more secure than some of the e-banking services they have seen.”
To realise these significant data storage savings, fund managers must accept outsourcing and the loss of control that comes with that. Whether or not cloud-based options are currently able to provide a reasonable cost-effective alternative does not seem to be understood in any clear and quantifiable way by either the fund managers, the service providers, or the hackers.
Discuss: Blind men & elephants