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!

Comments (25)

Jul 4, 2020 - 11:21am

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)

  • Analyst 2 in HF - EquityHedge
Jul 4, 2020 - 8:41pm

What do you think is the average size of a book after leverage at a blue chip platform like Citadel and MLP? slope?

Most Helpful
Jul 4, 2020 - 10:51pm

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.

Jul 6, 2020 - 9:39pm

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.

Jul 7, 2020 - 11:35am

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

  • Intern in IB-M&A
Jul 4, 2020 - 11:12pm

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?

  • Analyst 2 in HF - EquityHedge
Jul 4, 2020 - 11:58pm

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

Jul 6, 2020 - 10:08pm

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

  • Intern in IB-M&A
Jul 9, 2020 - 3:25am

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.

Jul 9, 2020 - 10:50am

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).

Start Discussion

Total Avg Compensation

September 2020 Hedge Fund

  • Vice President (18) $520
  • Director/MD (10) $359
  • Portfolio Manager (7) $297
  • 3rd+ Year Associate (18) $269
  • 2nd Year Associate (25) $242
  • Engineer/Quant (46) $237
  • 1st Year Associate (58) $189
  • Analysts (175) $167
  • Intern/Summer Associate (12) $134
  • Junior Trader (5) $102
  • Intern/Summer Analyst (183) $80

Leaderboard See all

Jamoldo's picture
LonLonMilk's picture
Secyh62's picture
CompBanker's picture
Addinator's picture
Edifice's picture
redever's picture
frgna's picture
NuckFuts's picture
bolo up's picture
bolo up