Prop Trading - vs Hedge Fund - How do They Compare

What are prop firms?

Proprietary trading firms, commonly known as prop firms, are financial institutions that engage in proprietary trading activities using their own capital instead of client funds. Unlike traditional investment banks or commercial banks that primarily serve clients, prop firms focus on capitalizing on short-term price changes in various asset markets to generate profits for themselves.

Prop trading involves a wide range of financial instruments, including stocks, bonds, interest rate and credit products, mortgage-related securities, loan products, commodities, currencies, and their derivatives. Prop traders employ various strategies, such as arbitrage, high-frequency trading, quantitative modeling, and statistical analysis, to identify opportunities and execute trades with the goal of generating significant returns.

One key distinction between prop firms and other financial institutions is that the profitability interests of prop traders do not align with those of their clients. While banks and investment firms typically act as intermediaries, managing and investing client funds to achieve their clients' investment objectives, prop firms trade for their own benefit. This allows prop traders to take on more significant risks and pursue potentially higher rewards, as they have the flexibility to adopt trading strategies that may not be suitable for traditional client-focused institutions.

Prop firms often attract skilled and experienced traders who seek greater autonomy and the opportunity to directly participate in financial markets. Traders in these firms benefit from access to the firm's resources, cutting-edge technology, research and analysis tools, and risk management infrastructure. They can leverage these advantages to implement proprietary trading strategies with the aim of outperforming market benchmarks and generating substantial profits.

What are hedge funds?

Hedge funds, considered alternative investment vehicles, operate as private partnerships and often establish their tax and regulatory structures in countries with favorable tax rates. These funds stand apart from traditional mutual funds, exhibiting complexity and privacy that make it challenging to gain a comprehensive understanding of the industry as a whole.

Conceptually, hedge funds can be viewed as pools of capital that invest across a diverse range of asset classes and rely on the performance of a carefully selected subset of funds to maximize returns for their investors. These funds employ sophisticated asset management techniques and intricate trading tactics to pursue enhanced profitability. Their sources of capital typically include institutional investors such as endowments or pension funds, as well as high-net-worth individuals who possess the financial capacity to absorb potential losses associated with more aggressive trading strategies.

At their core, hedge funds are investment firms that attract capital from a broad spectrum of investors and deploy those funds in financial markets with the aim of generating absolute returns. These funds often charge substantial fees to their clients, reflecting the potential for outsized returns and the specialized expertise required for their investment strategies. Hedge funds encompass various categories, including private equity funds, which focus on acquiring ownership stakes in private companies, and other specialized strategies that deviate significantly from conventional approaches in personal finance.

The distinguishing feature of hedge funds lies in their investment strategies, which often deviate from traditional long-only positions found in mutual funds. Hedge fund managers employ an array of strategies, including long/short equity, event-driven, global macro, relative value, and quantitative strategies, to name a few. These strategies enable hedge funds to seek returns regardless of the direction of markets, profiting from both rising and falling markets through strategies such as short-selling, options trading, and leveraging.

Difference between hedge fund and prop trading

How are prop trading and hedge funds similar?

Proprietary trading and hedge funds share certain similarities in their approach to investing and the financial markets. While they have distinct characteristics, there are areas of overlap between the two. Let's explore the similarities:

Best Forex prop firms

According to experts, the following are some of the best Forex prop firms:

1

9.4/10

Go to broker

Your capital is at risk.

Minimum deposit:

$1

Review

Topstep is an international proprietary trading company registered in the USA. The company has been providing financial services since 2012 and offers exclusive trading terms for clients from different countries. Topstep provides financing of real trading accounts of its clients if they prove the skill to make trades and manage risks on a simulation account. Traders can trade CME Group futures. Trading on real accounts is carried out through the ECN broker Equiti Capital.

Pros/Cons

•Real trading accounts are financed by a broker, there is no need to invest your funds in trading.

•The company provides a wide range of free training materials, including free group coaching.

•You can contact the support team using several convenient methods.

•The broker offers a referral program for extra income.

•The company doesn’t offer bonuses, automated trading, or other passive income options.

•The support service works only on weekdays during set hours.

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2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

€155

Review

FTMO is an international proprietary trading company created in the Czech Republic in 2014. The platform brings traders into its fold and after traders successfully pass a two-step testing regime, FTMO transfers 400 thousand dollars to the trader’s account. Transactions are monitored by FTMO to grow the deposit. There is a payment of 80% at the first stage of real trading. The 90% Profit Split is available only to those FTMO Traders that have reached Scaling Plan. The company works in full accordance with European financial legislation and is under the local regulator.

Pros/Cons

•Quite low testing cost is €155.

•Classic platforms such as MT4, MT5, and Ctrader are familiar to many traders. For these platforms, hundreds of indicators, scripts, and advisers have been developed.

•The starting reward is 80%.

•Diversification of tariff plans. Candidates can choose a demo deposit from 10 thousand to 200 thousand US dollars. There are tariff plans that span from standard to aggressive trading.

•Leverage is up to 1:100.

•Strict requirements for the test period. The allowable maximum loss is 10% of the deposit amount. The target profit is 10%, for which 1 month is provided.

•There is no information about how the company is funded.

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3

9.1/10

Go to broker

Your capital is at risk.

Minimum deposit:

$119

Review

Funded Trading Plus clients trade CFDs on currency pairs, indices, precious metals, energies, and cryptocurrencies. There are 18 programs with one- and two-phase challenges, or without evaluation. These programs also differ in initial fees, profit targets, maximum total drawdown, and other criteria. Traders can receive from $5,000 to $200,000 under management upon successfully passing the challenge or immediately if they choose the program without evaluation. Scaling up to $2,500,000 is available. The profit split is 80%/20% at the start and 90%/10% or even 100%/0% later. Traders work on MetaTrader 4 and MetaTrader 5. Leverage is up to 1:30.

Pros/Cons

•Wide choice of programs with universal parameters and acceptable requirements;

•One-time initial fee, refundable for programs with one- and two-phase challenges. No monthly subscription;

•Simple and understandable conditions, no hidden obligations, and profitable trading split;

•The prop firm partners with Eightcap and ThinkMarkets. It offers spreads from 0 pips and low trading fees;

•A demo account with $100,000 in virtual funds is available for exploring the trading process and instruments;

•24/7 technical support is provided via four communication channels;

•Deposits and withdrawals are made with Visa, Mastercard, bank transfers, and crypto wallets without fees.

•The Master program without evaluation is very expensive — a non-refundable initial fee of $4,500 is required for the balance of $100,000;

•Funded Trading Plus offers only CFDs without real assets or futures;

•The firm’s website contains much information, but some important nuances, like the reset fee, are not provided.

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