Prop Trading Vs. Hedge Fund -What’s the better option to Choose?
Day-by-day trading gets more popular. In this way, many people run their personal accounts using proprietary trading (prop trading). Many people decide to start their own trading business using prop trading, while on the other hand, some join hedge funds for their careers.
In this article, we will discuss prop trading and hedge funds.
What is prop trading?
Prop Trading happens when a bank’s derivatives, bonds, or other financial instruments are in its own account, using its own money rather than using the client’s money.
In other words, the firm uses its own funds to earn profit instead of depending on client fees and commissions.
Prop Trading provides mutual benefits to the participants. Some popular prop trading websites are DTTW, FTMO, and many others.
How Prop Trading Works
The concept of prop trading is simple to understand. It is mainly related to the two things: the company and the traders. The company provides trading platforms, and after this, traders can create their own accounts, learn the process, and take part in it. After this, they are successful and start trading.
Advantages of Prop Trading
The Advantages of prop trading include;
Capital: Using a prop trading firm will give you access to more capital as compared to another retail account.
Trading floor: In today’s world, it is difficult to make a trading floor on a retail account, but prop trading makes it easier.
Higher profits: You are using much more trading capital, but prop trading firms allow us to make a profit.
What is a Hedge Fund?
A hedge fund is a financial institution that pools investor’s money to make high-risk investments with the aim of making huge returns. Hedge funds make money in two ways;
By taking an administration fee and by taking an incentive fee. Some of the popular hedge funds are AQR Capital Management, D.E. Shaw, citadel, and many others.
How Hedge Funds Work
A hedge fund is a company that increases funds, and if you are an expert in trading and investment, you can agree with people to invest in your firm. Then you will give them profits.
Advantages of Hedge Fund
The Advantages of hedge funds include;
Flexibility: These firms are more flexible in sharing funds in the market.
High Returns: These hedge funds can give high returns. They can attract highly experienced talent.
External Investors: Hedge funds have a higher profitability ratio than prop trading.
Prop Trading vs. Hedge Fund
Let’s dive into some of the differences of Prop Trading and Hedge Funds:
Prop Trading
- Capital starts from the firm itself.
- Prop Trading firms are less regulated.
- Prop trading involves the use of leverage to amplify trading positions using borrowed capital.
- Prop Trading firms are focused on short-term trading activities including equities, fixed income, currencies, and commodities, depending on their expertise and strategies.
Hedge Funds
- Capital comes from external investors, who invest with the expectations of returns.
- Hedge Funds are those that follow strict regulations.
- Hedge funds may use leverage to enhance returns, but it is not a defining characteristic.
- While Hedge Funds focused on diverse investment strategies, including equity long/short, global macro, event-driven, and more.
This article is all about the concept of prop trading and hedge funds. A common question raised here is which option is better, a prop trading firm or a hedge fund, and the best answer is prop trading because it is easier to join as an already established firm. But Prop traders bear the risk directly, while hedge fund investors share in the risks and rewards of the fund's investments. Getting into a hedge fund is not easy because raising hedge fund capital is a difficult process.
