Aside from the reg./marketing issues and net worth req. plus the solicitation of outside investors is there really a true difference between a hedge fund (broadly defined) and a prop firm. It seems like they basically do similar trading patterns though most prop firms do not engage in currency swaps, derivatives, et al but I see no regulatory requirement barring them from doing so. Moreover, though most prop firms engage in intraday trading as their primary vehicle they could take longer positions. The only principle difference might be that prop firms garner a lot of revenue from commisions and rebates while hedge funds are purely trading vehicles. If anyone from a hedge fund or a prop firm could discuss the major differences please do so. Ciao.
Let me provide some feedback from the Hedge Fund angle... A Hedge Fund is a Limited Partnership or a LLC that is limited to "qualified investors". A qualified investor is defined as an individual with a large amount of assets or a institution such as a pension plan. Most Hedge Fund Managers receive a set fee of 1-3% of assets for expenses each year. The real money is made in the hitting target profits for the fund. Most hedge fund managers will receive approx 20% of the gains if the profit targets (water marks) are hit or exceeded for the fund. A successful hedge fund can be very profitable for a manager which is why many good managers fled large Wall Street firms to start them. Note that hedge funds with less than 99 qualified investors do not require extensive SEC oversight. The objective is to always fit into this category. Hedge Funds are not allowed to advertise. Most opportunities are fed via brokers/intermediaries to high worth individuals. Most Hedge Funds do not intraday trade. The last review indicated that less than 2% performed any intraday trades. Most Hedge Funds fit into one of the following strategies: - aggressive growth - Convertible Arbitrage - Country specific - Commodities (requires CTA) - Distressed - Emerging Markets - Event Driven - Fixed Income Arbitrage - Long only - Market Neutral - Options Arbitrage - Private financing - Short Bias - Short Term Trading - Venture Capital Also a Fund of Funds is an hedge fund that includes multiple other funds and charges more fees but spreads out the risk. It is very difficult for a Hedge Fund of any decent size to engage in short term trading and provide the expected returns to their limited partners. The size of the trades would greatly impact the market. Most hedge funds that engage in short term trading are usually under 30M in size and are considered "small". Most can not grow greater than this in size and be successful. I view that a Hedge Fund is very different than a Prop firm. There are many Prop firm folks on this board than can provide good input regarding the prop side.... - Greg