Prop vs MM PM terms

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I have a good sense of standard PM terms for the large MM platforms (15-20% payout, top line expenses etc.), but have no idea if those translate to the top prop shops (Tower, Jump, DRW etc.). Given that a lot of these firms are trying to move into non HFT/ lower frequency strategies would be interesting to hear anyone's input.

Comments (37)

 
  • Analyst 3+ in HF - EquityHedge
Jul 21, 2020 - 12:10am

Much higher payouts. Need to be negotiated and very artisanal. Leverage used is also much higher. Not sure how good Tower is these days but generally a better deal if you have high sharpe.

 
  • Analyst 3+ in HF - Other
Jul 21, 2020 - 12:29pm

Thanks for the info - so is the expectation that the larger prop shops pay around 35-40% take home vs the 15-20% take home from a MLP or Citadel?

Agree that MM theoretically can run much larger books, but from what I've heard (at least in the mid-frequency realm), the prop shops seem to start you out at around the same size. Assuming your strategy is somewhat capacity constrained, it could make sense for one to go to a prop shop (also assuming that the payouts are actually higher).

That said, I'd guess if you have ambitions to expand strategy scale and capacity, certainly a place like MLP with unlimited capital would be better if you are able to perform at the higher capacity.

 
  • Analyst 3+ in HF - EquityHedge
Jul 21, 2020 - 8:19pm

I would say overall risk is tighter at prop firms. Being forced to run beta neutral isn't that bad and there are allowances to how much loading you can have on each factor. At prop, at the first sign of trouble they'll cut.

Main consideration for OP is how many strats/ frequency/ capacity/ turnover

 
Jul 21, 2020 - 10:25pm

But operating in a beta-neutral portfolio with focus on sharpe means that a high return is ~5%.... if you can run 100% net long you can return more than that from beta alone.

All I’m saying is I’m not entirely sure it’s as clean cut as saying that mm is always better than prop funds. Both are probably just as risky because both models are about producing returns on a consistent basis.

EDIT: I’m referring to fundamental shops so maybe quant is different.

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