Prop firms v. Hedge funds

G

garfangle

Aside from the reg./marketing issues and net worth req. plus the solicitation of outside investors is there really a true difference between a hedge fund (broadly defined) and a prop firm. It seems like they basically do similar trading patterns though most prop firms do not engage in currency swaps, derivatives, et al but I see no regulatory requirement barring them from doing so. Moreover, though most prop firms engage in intraday trading as their primary vehicle they could take longer positions.

The only principle difference might be that prop firms garner a lot of revenue from commisions and rebates while hedge funds are purely trading vehicles.

If anyone from a hedge fund or a prop firm could discuss the major differences please do so.

Ciao.
 
Let me provide some feedback from the Hedge Fund
angle...

A Hedge Fund is a Limited Partnership or a LLC that
is limited to "qualified investors". A qualified investor
is defined as an individual with a large amount of assets
or a institution such as a pension plan.

Most Hedge Fund Managers receive a set fee of 1-3%
of assets for expenses each year. The real money is
made in the hitting target profits for the fund. Most hedge
fund managers will receive approx 20% of the gains if the
profit targets (water marks) are hit or exceeded for the fund.
A successful hedge fund can be very profitable for a manager
which is why many good managers fled large Wall Street firms
to start them.

Note that hedge funds with less than 99 qualified investors
do not require extensive SEC oversight. The objective is to
always fit into this category. Hedge Funds are not allowed to
advertise. Most opportunities are fed via brokers/intermediaries
to high worth individuals.

Most Hedge Funds do not intraday trade. The last review
indicated that less than 2% performed any intraday trades.
Most Hedge Funds fit into one of the following strategies:
- aggressive growth
- Convertible Arbitrage
- Country specific
- Commodities (requires CTA)
- Distressed
- Emerging Markets
- Event Driven
- Fixed Income Arbitrage
- Long only
- Market Neutral
- Options Arbitrage
- Private financing
- Short Bias
- Short Term Trading
- Venture Capital

Also a Fund of Funds is an hedge fund that includes multiple
other funds and charges more fees but spreads out the risk.
It is very difficult for a Hedge Fund of any decent size to engage
in short term trading and provide the expected returns to their
limited partners. The size of the trades would greatly impact the
market. Most hedge funds that engage in short term trading
are usually under 30M in size and are considered "small". Most
can not grow greater than this in size and be successful.

I view that a Hedge Fund is very different than a Prop firm.
There are many Prop firm folks on this board than can provide
good input regarding the prop side....

- Greg
 
Most Hedge Funds fit into one of the following strategies:
- aggressive growth
- Convertible Arbitrage
- Country specific
- Commodities (requires CTA)
- Distressed
- Emerging Markets
- Event Driven
- Fixed Income Arbitrage
- Long only
- Market Neutral
- Options Arbitrage
- Private financing
- Short Bias
- Short Term Trading
- Venture Capital
More...

I would have to add

Risk Arbitrage

to this list.

nitro
 
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