Prop vs. Hedge Fund

Discussion in 'Prop Firms' started by Lights, Aug 13, 2006.

  1. I've seen prop firms offer upwards to 10MM overnight buying power with $1MM up. 10:1 at >90% takehome on profits.

    Why then do money managers take the route of opening a prime brokerage account and raise investor capital to keep a much lower profit split? (ie 1%+20%)

    If i wanted to run a fund of say $20MM, wouldn't it better just to deposit $2MM at a prop and take home most or all the profits?


    I have asked my self the same thing.

    Save yourself the head ache and red tape.
  3. Different goals, different risks.

    Besides, most "startup" managers don't have 2MM to deposit.

  4. aren't prop shops basically a prime account that's worked an agreement with a clearing firm? and then divide the leverage and subaccount to each of their prop traders? owners afford this via capital deposits from traders and expense the use of overnight leverage via interest costs (haircuts) to trader. this helps pay the financing/leverage they receive from clearing.

    i'm just wondering if all prop traders are undercapitalized traders or if there is another advantage to staying in prop vs. opening a fund with the clearing agency.

    one issue i can think of regarding big money up at prop, you are at risk of other traders blowing up or underperforming which could adversely affect your situation at that locale. every trader there is slave to the aggregate health of the master account. a co-op of sort.

    another thing i can think of is money up at prop is not insured while ur monies at a prime brokerage acct is.

    anyone left prop to pursue a fund and reason? Feel free to PM if need be.

  5. if you mean starting a prop and backing traders:

    you get to finalize all decisions as a HF director.

    Prop you're risking it on the trader's final input right?

    if you mean getting backed at a prop:

    personal risk . . you can lose everything. OPM is great.
  6. its a good point ...but its something you need to think about

    lets say someone puts up 1 mil for 10 mil in bp
    a 10% drawdown and its GAME OVER for him
    BUT lets say he returns 20% for the yar...he makes 2 mil...a great amount of loot

    NOW...same guy raises 10 million and leverages it 2x 1
    lets say he returns 35% for year on leveage - overnight interest

    on 10mil he takes home 2% up front = 200k

    plus 20% of the 3.5 in profti...anotehr 700k
    so 900k in his pocket with much less risk (after BS fees prob like 800k)


    looking 10 years out...with option 1...ur always a 10% drawdown away from losing everything

    wiht option 2...not only do u have no of your own risk....if u have good years youll be managing an EXPONENTIALLY HIGHER amount year after the same numbers with 300million and its a much differnt story

    in short term ...prop is def way to go...especially with lack of headachs...but if ur plan is to manage TONS and TONS of money...the fund option is the way to go..esp with the fees up front guaranteeing you make a living at worst

    personally..i think i favor the lack of headaches and responsiblity only to myself...which is why i am prop..but u never know
  7. bl7077


    Also, many hedge funds have much longer time horizons for holding positions than would be tolerated at a prop house.
  8. well firstly, proprietary, is for any self-fullfilling trader who doesn't have time to meet clients and basically makes money for himself. call it a self-run business. 90% profit take home? on what, $20mil (after levered)?

    HF is a BUSINESS business. its what you call a limited liablity partnership (LLP). the set up allows you manage a pool of money and typical HF's AUM = $500mil-$2bill. some even more. oh btw, did i mention the leverage prime broke account give? lets just say LTCM had positions worth $1trillion. i think u got the idea. (in 1998 they lost 500million in just one day!, how many props can afford that i wonder).

    so 90% prop vs. 2-20% HF AUM. i think u know which u'd prefer.

    anyways, it really comes down to a business model. HF is MORE of a 'business', and shit load of people go under 'HF' because of the set-up advantages it gives - i.e. no registrations etc.

    "If i wanted to run a fund of say $20MM, wouldn't it better just to deposit $2MM at a prop and take home most or all the profits?"

    fund and propping are totally different things. propping = proprietary. fund = pooled money. again two entirely different things, different businesses. it's not about how much money. it's about if it's prop or open or closed fund. some HF are even listed on exchanges for issues. props don't.

    hope that makes all sense.
  9. thx for the post.

    but aren't most prop firms pooled money from traders, principals and financed cap from outside investors? the business of prop sounds similar to a hedge fund, since it's pooled monies to leverage a master account with a clearing arrangement. sounds like a hedge fund with exception of how profits are distributed to it's traders.

    this is straying off a bit, but if you run a prop firm, isn't this just a variation of a hedge fund? i know prop firms that aren't even affiliated with a b/d and are unlicensed. therefore, unregulated like HF.

    all one big grey area?

  10. no way. no no. "proprietary", remember that. a prop has no outside investors. strictly speaking, the defining line is in the legalities.

    this is what i would say about the two:
    most pro pros are typically ex-floor traders on major exchanges.. they invest their own money into the business, maybe with some partners. obviously, they have good credit too so they may trade on margin with their broker, whatever the account. if a junior works in a prop (investing the house money, not external investors), the principal sets some level on how much this junior can trade, or lose on a trade or over some time. if he is good, principals allow him to invest more of the house money, or increase the credit. eventually becoming a partner or leave starting his own prop. so basically, it's like a small family lol. most pro props also provide other services like brokerage for external clients (again to arbitrage and profit from client trades, or benefit from more volume traded = lower house commision). they may clear their trades themselves, or provide clearing for external clients too.

    remember, a prop house and a trading "arcade" are not exactly the same. in a trading arcade, u have individual traders who trade their own pocket money at once place, and the arcade acts as the broker, and may provide credit, margins, and friendly commission rates.

    now a hedge fund. of course, given the wide varaiety of hedge funds and some prop houses, it's difficult to draw the line between the two.

    at extreme comparison, look at it this way: hedge funds are investors. props are market makers.

    'specialists' working on floors, pro props are generally market makers, with their own money.

    the benefit of a HF lies mostly in the legalities - which surrounds alot of contraversy. CTAs and HF are more or less the same thing.

    HF - pooled investment fund, managed by principals with some of their own money. open only to very wealthy clients. used many strategies to trade. have prime brokers (typically banks), with very nice credit margins.

    prop houses. trade on their own account - from their own pocket. no investor. may be a prop house of 1, or many partners. Atlas has 2 i think, Optiver has about 7. they leverage their positions too, but not as high as HF. if you work for a prop, you have to trade by their rules, strategy, and mainly trading their money.

    trade arcades, you're on your own. nice credit/margin only if you're a genious, low commisions with high volumes.

    the trouble is, on this forum, everyone is known as a 'prop'. if it is run as a full house business, than it fits what I've described above. most props that I know, are market makers.

    #10     Aug 13, 2006