The “cloud” may sound like a pretty amorphous word but for asset managers. But the recent recession, market volatility and regulatory requirements have made it pretty real.

With the Dodd-Frank Wall Street Reform Act, European Union mandates such as the Undertakings for Collective Investments in Transferable Securities, the European Market Infrastructure Regulation and the Alternative Investment Managers directives, asset managers will need to assume a greater compliance burden — one that will require additional recordkeeping resources.

They’ll, of course, be doing this with tighter budgets.

One way of doing so at a lower cost is through private cloud computing.

It’s a form of delivering technology services which provides users with on-demand access to a flexible pool of technology assets that includes services, applications, servers, networks and storage facilities. While its critics are still concerned about security risks, advocates say that it eliminates plenty of the cost involved with maintaining hardware and software on premises.

“Many of the resources in the operating environment are dedicated to a single firm, ensuring that the data never shares virtual space with another company,” says Michael Stoeckert, chief technology officer for SunGard’s Asset Arena unit, which offers portfolio management and other middle-office functions.

“The private cloud is pretty conducive to many middle and back office functions such as investment accounting, reporting, and risk metrics,” says Stoeckert.

So how is an asset manager to choose the best provider? Here is a brief checklist of the top six criteria.

Understand your Business: The private cloud provider has to understand not only how an asset manager works but the regulatory issues it faces. If they don’t they won’t be able to comply with any audits either from the Securities and Exchange Commission, Financial Services Authority, or other regulatory agencies. They also won’t be able to be up to snuff in complying with SAS 70 standards- that’s the top ranking of the securities processing industry.

Full control: Many private cloud providers claim they do all the work but they outsource parts of the business – namely control of the data center—to other providers. “Such a scenario could cause plenty of problems should there be any computer glitches by the ultimate data center operator,” says Stoeckert. If the data center operator is in an offshore market it may also be quite difficult to gain physical access and may not meet the privacy requirement of the nations in which the fund managers do business.

Financial Soundness: Securities firms often speak of minimizing counterparty risk. If your partner isn’t financially solid there is a likelihood you will find yourself tracking down where your collateral and funds are located if it goes bankrupt. In the case of a cloud provider, you will be looking for where your data is. Warning sign: A deal that’s too good to be true. If the private cloud provider is charging far less than any of its competitors for the same service chances are it could be willing to incur a short term financial loss just to gain market share.

Automated Upgrades: If an application or service running on a private cloud needs to be upgraded, a fund manager can’t wait for several months until the cloud provider makes an upgrade to the underlying operating system. “If multiple applications are run on the same operating system – such as Linux, Unix or Microsoft – the cloud provider should be able to make the necessary adjustments to apply to only a particular application,” says Stoeckert.

Scalability: It’s important for the cloud provider to be able to adapt quickly to increased – or decreased capacity and charge accordingly. Case in point: an asset manager purchases another fund management shop and automatically doubles the size of its book of business. It needs to be able to ensure that all the applications which run on the private cloud can be adapted to the additional workload immediately. It also needs to ensure that should the asset manager have to scale down – reduce the value of assets or number of applications operated in the cloud that it can also do so quickly. And it won’t be stuck paying the higher fee for the duration of the contract.

Security: It’s the one criterion that no fund manager can afford to overlook. Stoeckert’s advice: Always pick a long-established provider which offers sound encryption, intrusion detection and prevention, establishes policy controls for access and easy ability to monitor.

This column originally appeared at Securities Technology Monitor.

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