Prop Firm vs Hedge Fund: Is Working for Prop Firm Better?

In this article, we will look at the comparison between prop firms vs hedge funds. Prop firms have been increasingly popular and it is now easier for traders to get a funded trading account. There are a lot of funded trading programs to choose from. Some like FundYourFX and Audacity offer instant funding without having to participate in challenges. This is why a lot of traders are trying to get funding from prop firms. It is just so much simpler to join a prop firm and get funded than to join a hedge fund. So let’s take a look at what prop firm vs hedge fund is all about.

What is Funded Trading?

Funded trading is when a prop firm provides traders with the chance to trade with a firm’s capital rather than their own money. This gives traders who are working for the firm a chance to make a profit for themselves.

In terms of market information, such firms frequently have an advantage over the average investor. Another advantage is the availability of advanced analysis and trading software.

Although it is generally viewed as risky, funded trading with a prop firm is usually one of the most profitable operations.

What is a Hedge Fund?

Hedge funds were initially designed to hold both long and short stock holdings, allowing them to be “hedged” to decrease risk. Investors could profit whether the market was up or down.

Hedge funds are typically only available to skilled investors with specified wealth or income requirements. In a nutshell, they are not widely available to the general public and rely on huge deposits to invest in a variety of assets. 

They are mostly managed by institutional investors who employ a wide variety of unconventional trading methods with the primary purpose of risk mitigation.

The following are some of the most prevalent hedge fund characteristics:

  1. Fewer rules and regulations
  2. Uses a variety of funds and invests in several financial markets.
  3. It employs flexible investment strategies.
  4. Not all hedge fund firms require registering with the SEC.

What is the difference?

Hedge funds raise capital from outside investors (Limited Partners), while prop trading firms do not. Hedge funds use their clients’ money to invest in financial markets. They get rewards for generating profits from these investments. Hedge funds, as opposed to prop traders, are accountable to their clients.

By investing in financial markets, prop trading seeks to boost the firm’s balance sheet. Because they are not dealing with client funds, traders can take bigger risks. Firms enter prop trading with the expectation of gaining a competitive advantage and access to important information that will allow them to make large profits. The traders are solely accountable to their firms.

They may be aggressively managed or use derivatives and leverage in both domestic and international markets with little or no consideration for short-term price fluctuation. 

The trading strategies are also considerably different since most prop trading firms earn money by exploiting small pricing inefficiencies (market-making), whereas most hedge funds gamble on the movement of securities prices.

Advantages of Funded Trading

Increased profits are one of the advantages of having your trading account funded. As opposed to operating as a broker and receiving commissions, the firm receives 100% of the earnings from prop trading.

Private traders have access to sophisticated prop trading technology as well as other automated tools. They have access to a wide range of markets and the ability to automate operations and engage in high-frequency trading thanks to sophisticated computerized trading platforms.

Advantages of Hedge Funds

One advantage of hedge funds is that investors adopt aggressive techniques to achieve a high return. These investment strategies include short selling, borrowing money to acquire more assets (leverage buying), and derivatives.

Another advantage of using hedge funds in your portfolio is the big amount of money that can be made. The goal of hedge funds is to get a high return regardless of market volatility at any particular time.

In Conclusion

If you want to be a hedge fund trader, you could start as a trader in a prop firm to build up your skills before moving on to be a hedge fund trader. it is a lot more difficult to join a hedge fund than it is to join a prop firm. To summarize the main difference between prop firm and hedge fund are:

  1. Having a funded account, you can take a much higher percentage of profits yourself.
  2. Because of the considerably smaller capital base (tens of millions to hundreds of millions), it is possible to earn extremely high annual returns (100 percent, 200 percent, and so on).
  3. Prop trading firms are more independent and frequently operate in smaller/niche markets that institutional-level corporations ignore.

Hedge funds are a sort of investment instrument that is often only available to rich individuals and institutional investors. So if you are neither, then you have to stick with a funded trading account. If you are interested in getting a funded account, be sure to read our article “What You Need to Know Before Choosing a Prop Firm” or check out our review page to see the list of the best prop firms to join.


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