Prop firms v. Hedge funds

Discussion in 'Trading' started by garfangle, Jan 29, 2002.

  1. 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.

  2. gwb-trading


    Let me provide some feedback from the Hedge Fund

    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
  3. gwb-trading


  4. nitro


    I would have to add

    Risk Arbitrage

    to this list.