Difference between Hedge Fund and Prop Shop
For example, what is the difference between First NY and Millennium Management or Citadel? Let's say that the Prop Trader and HF PM both trade in the same asset class. Is there really any difference between the two? I know this question may be very dumb, especially because all prop traders and HF PMs probably have different strategies. But in the general sense can anyone explain the difference? Thank you in advance!
boomp
Prop trading is trading with the firms money,thus keeping 100% of profits within the firm, while HF trade with clients money, profiting off of the fee structure of the fund (ie 2 and 20). Like you said the two don’t usually trade the same type of way, prop trading is usually more a market making strategy(but not always) than an investing strategy which a lot of hedge funds do(but again not always)
Agree. More pragmatically, for the most part there is a lot more capital available at a multimanager HF than at a prop shop. I'd guess the average MLP/Citadel PM manages at least 10x the AUM of a PM at a prop shop like FNY. I believe the payout % might be higher at most prop, but not nearly enough to offset the smaller AUM.
What do you think is the average size of a book after leverage at a blue chip platform like Citadel and MLP? slope?
So why is it that prop shops ended up with market-making strategies and HF with long term strategies? Can't one do the other and vice-versa?
One reason I can think of is that - market-making strategies in prop shops perhaps have better risk/reward ratio (e.g. pure arbitrage is practically riskless). However, they don't have the scalability that HF long-term investing strategies do.
Yeah, market making has lower capacity and higher sharpe, so it's just a better fit.
as a market maker, you are not holding positions overnight from one day to the next...which means that you need less capital to operate.
also, there is less total profit available in market making vs longer term position holding...so a smaller capitalized player needs less total profit to make a high % return on their capital.
a $20bln fund needs to make 4bln to make a 20% return...almost impossible to make that much $ just from market making in today's markets with tight spreads...which is why hedge funds and asset managers hold positions for longer time periods...trying to capture larger moves....which are required to make the large returns that they are looking for
As said in the prior comment, the only real difference is the source of capital. A hedge fund invests clients and a prop trading firm uses internal capital.
Thanks for the replies. Is it common to see people transition from prop shops to more typical hedge funds. I know it depends on the strategy but how about prop traders to L/S equities or Global Macro?
I don't think it is that common. I think most prop shops are looked down upon. I know 99% of SM HFs won't ever look at someone from prop shops for analyst seats. It's a different story once you run actual size and are looking for a PM role tho
It is probably because of capacity (of their strategies). Funds are generally only interested in strategies that have substantial capacity, say >100Mm and potential to scale.
PT = MM HF = IM/AM
Completely false
MM as in market maker
i started on the sellside as a dealer trader...i was a market maker...but that lead to managing a portfolio of illiquid positions that clients gave to me (that i didn't want)...majority of my timw was spent either
a) trying to unwind those positions given to me from clients b) making markets to clients (getting more positions i didn't want...but sometimes making the bid/ask spread) c) prop trading to make real PnL
i'm now a prop trader...essentially just doing (c). I don't make markets anymore...i'm just a prop trader. There are PMs as Millenium that trade the same thing, the same way as i do...and also at prop firms like FNY.
Then you have portfolio trading....where the trading is really pairs/butterfly trading...betting on under/out performancce of one asset vs another (which is not prop trading because it implies longer holding periods). A prop trader can generally (but not always) be flat at the end of the day every day. A prop trader seeks to make money from taking advantage of small price moves of securities intraday...vs an asset manager (hedge fund or otherwise) that seeks to make money from slower moving relationships.
there of course will be overlap and there are many different investing strategies...but at the end of the day, the primary difference is prop firms don't take investor money and hedge funds do
Prop Trading Firm Vs A Hedge Fund
Which of them is better for a long-term career? Is it possible/common to move from a hedge fund to a prop firm (and vice versa)? Also curious about your view on the future of PT?
Are there any prop shops that don’t just trade intraday? Any with longer holding periods that function more like traditional HFs? I know it probably depends on the the pod and the trader, was wondering if any prop companies in general were known to run more like a HF.
FNY and DV are both "prop shops" but they hold positions if they want, because they have enough capital to allow them to do so....not billions of AUM.....but enough.
For a 100mm prop shop...you can be a market maker and day trading scalper and make enough money (without taking unnecessary risk) to make a good return on your capital.
However, if you have 5bln of AUM....you will max out your P&L with scalping and market making and still not get to enough P&L to make 20% return on your 5bln of AUM....and this is why larger funds must have longer holding periods...because they need to make larger returns with lower risk...so they play for the bigger moves, which tend to take longer to play out.
i know a couple PMs on this board who work at MM HF pod shops and they are in the scalping business...but their P&L has a ceiling...something in the 50-100mm/year area. this is fine if you are only runing 1bln. But give that guy 5bln and if his P&L doesn't go up because he has maxed the capacity for his strategy....then the fund would rather give that AUM to another PM who has a strategy that can handle the larger size (and still perform).
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