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!
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.
Citadel has definitely the largest, particularly when you consider that many analysts working for a PM run their own sub-book. When considering the entire team, I'd say average Citadel team is $2-3bn.
MLP i think only the very largest teams run that much. Average maybe closer to $1bn?
Open to corrections on both, but fairly sure that is the ballpark.
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