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Prop Trading Vs Hedge Funds

The difference between hedge funds and prop trading firms is that hedge funds raise capital from outside investors and use their clients’ money to invest in financial markets whereas prop traders use the firm’s own capital. Hedge funds are paid to generate gains on these investments for their clients.

Unlike hedge funds, prop trading firms get to keep 100% of the money they make. They trade for themselves to bolster the firm’s balance sheet, rather than answering to their clients. Unlike in a hedge fund, a firm’s clients do not benefit from the turnover earned through prop trading. As a result, prop traders can afford to take more risks as they are not dealing with client funds in the way that hedge funds do.

Trading styles between the two differ too in that prop trading firms make profits from market-making while hedge funds bet on security price movements. Algorithmic trading and quant strategies are popular with both firms but are more important in prop trading.

Hedge funds and prop trading firms are similar in that they are both targets of the Volcker Rule.

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