Prop Trading vs. Hedge Funds (2024)

While prop trading and hedge funds tend to function differently, the two investment opportunities provide investors with unique ways to create profit. Prop trading is an investment style while hedge funds can be viewed as a type of partnership. Hedge funds work with third parties such as partners to invest funds. In contrast, prop trading firms usually provide traders with capital to use to trade for the firm. The two structures are focused on improving profits but execute the goal using distinct styles. Before trading, explore the differences and similarities to understand which type of structure would best fit your financial goals.

What is Prop Trading?

Prop trading, which stands for proprietary trading, occurs when a financial institution uses the firm’s capital to generate profits. Proprietary trading allows traders to invest in a variety of different assets such as currencies, stocks and bonds.

Proprietary trading includes risk and is subject to rules and regulations.

Experienced traders make speculative trades in a prop trading account that’s related to a brokerage or hedge fund. The prop trading firms allow knowledgeable traders to access significantly larger amounts of capital for trading-related purposes. To make a profit, traders usually take a portion of the commission from successful trades.

What is a Hedge Fund?

Hedge fund managers participate in a wide range of strategies to create profit for clients, including trading with leverage. Hedge fund managers need to keep clients happy, which hamstrings them a bit more than prop traders who need to satisfy the company’s profit targets. Hedge funds are actively managed and pool funds from investors to make a profit.

Hedge funds carry risk, and if you invest in hedge funds you place trust in hedge fund managers. The best hedge fund managers create a strong reputation to build trust and capability with investors.

Differences Between Hedge Funds and Prop Trading

Hedge funds and prop trading function in fundamentally different ways.

Capital Funds

Prop trading firms provide the capital necessary for traders to invest. In contrast, hedge funds obtain funds from a wide variety of sources such as private investors, corporations and other third parties.

Varied Fees

Hedge funds follow a “two and twenty” fee structure — a 2% charge for assets under management in combination with a 20% performance fee. To remain competitive, many hedge funds have lowered or changed their fee structures. In contrast, prop firms function using a different structure and split the profit made by traders. For example, prop firms take a portion of the profits made by a trader in combination with charging initial application fees and deposit charges.

Accountability Structures

Hedge funds are more accountable to clients because they use client money and third-party sources to make trades. In contrast, prop trading firms provide traders with the firm’s capital to make trades. Prop trading shifts the accountability structure by providing traders with capital. In addition to investor accountability, the regulations that prop trading firms and hedge funds follow differ. For example, prop trading firms experience less regulation than hedge funds.

Risk Differences

In terms of risk, prop trading comes with a higher risk because traders are using the firm’s capital to trade. It’s common for prop trading firms to engage in riskier behavior such as using leverage and investing in options. Although hedge funds engage in riskier investments, hedge funds actively engage in risk management to protect the fund and investors.

Similarities Between Prop Trading and Hedge Funds

Prop trading and hedge funds use similar strategies and strive to mitigate risk.

Goal to Create Profit

The key reason for the existence of prop trading and hedge funds is to make a profit. The two use different funding strategies but ultimately aim to increase their financial positions. To encourage profits, prop trading firms and hedge funds have created more attractive incentive plans while lowering trading-related fees.

Use Similar Strategies

Within the realm of investment funds, prop trading firms and hedge funds can use similar strategies and tools.

Strive to Mitigate Risk

Trading firms and hedge funds invest time and resources into mitigating risks. Risk mitigation can come in the form of setting guidelines and regulations or encouraging diversification. To decrease risk, prop trading firms and hedge funds strive to provide information and trading tools.

Compare Top Hedge Funds and Prop Trading Firms

Benzinga offers helpful insight that explores top hedge funds and prop trading firms. Before working with a top company, compare the benefits and drawbacks associated with each investing model.

Other Brokerages to Consider

Below is a deeper dive into top prop trading brokers.

1. SurgeTrader

SurgeTrader is one of the most prominent figures in the prop trading scene. When you want to invest with the massive funds available for a larger trading house, you can turn to a prop trading firm. SurgeTrader offers a range of benefits, including:

• Quick trader funding after your evaluation
• Quick account setup
• Powerful educational tools
• High profit shares (up to 90%)
• Several account styles
• A simple platform that’s easy to use

Turning to prop trading is a good way for you to learn, invest and grow your career. You can also make money if you know how to trade well and work well with the platform. Reach out SurgeTrader at any time for more information on prop trading.

2. FX2 Funding

If you’re looking for a simple prop trading firm, look no further than FX2 Funding. Their single-step evaluation process is easy to manage, and you will pay far less to get started. Once you get started, you can trade:

• Forex
• Indices
• Crypto and other instruments

With:

• Weekend holding
• Copy trading
• Expert advisors and other forms of automation

Because you can do so much to make your strategies work, you can make the most of the up to $200,000 you’ll be offered to manage your portfolio. If you want to start trading and become a professional, there’s no simpler way to get on the open market.

3. Top Tier Trader

When you get started with Top Tier Trader, you are entering a prop firm that allows you to become a trader, get the financing you need and succeed in an industry that can be difficult for many to access.

TTT offers a 2-step evaluation that allows you to get acclimated to their system and how the platform prefers that you do business. You can trade indices, forex, crypto and commodities with the leverage you require, and there are several accounts to choose from that can offer somewhere between $300,000 and $2 million in funding.

Plus, there’s no time limit on your evaluation, and there is the opportunity to hold overnight, depending on the program you choose. With profit splits between 80% and 90%, you can also get your initial fee refunded after your first payout and earn more with referrals to the platform.

True, not all programs allow for the use of EAs or copy trading, but the platform allows you to complete a thorough evaluation so that you know you’re ready to go and you can begin making a living as a trader without going to a massive brokerage house.

4. Tradiac

Designed for experience yet undercapitalized forex traders and beginners who want to get their foot in the door, Tradiac allows for accessible funding so that investors can turn prop trading into a career. Beginners can also take advantage of this platform and enjoy:

• Up to $100,000 in initial funding
• Up to a 15% to 30% daily loss limit
• Maximum drawdown
• Single-phase evaluation
• Instant 90% profit splits with no add-ons
• Scaling up to $1 million
• Use EAs whenever you like
• Weekend and overnight positions
• 20:1 leverage
• Quality customer support

True, the platform is not available in the U.S., but the funds are provided by hedge funds in London that keep tight control over risk management, protecting them and you as you grow your career.

5. OFP Funding

If you aren’t an expert and cringe at the idea of a test or challenge, OFP Funding is the right place for you. There are profit splits between 60% and 90%, depending on the account you have chosen.

There are no profit requirement, and this platform works well for scalpers, multi-asset traders, position traders and more. You can get leverage up to 100:1, use MT4 or MT5 and all your payouts are instant. Sure, you can’t use copy trading or EAs, but this is a great place to learn and get paid.

6. E8 Funding

As you venture into the world of prop trading, you will find that E8 Funding offers a unique experience that funds individual CFDs (Contracts for Difference) and forex trading.

To get started, you’ll complete an evaluation, and those who are skilled enough to continue are given an E8 Funding account, funds are deposited in that account and you can start trading right away.

With a profit share of 80% for the trader, E8 Funding makes it easy for you to earn an income from prop trading if you understand the forex and CFD space. There’s no loss exposure for traders, and there are a few other benefits, including:

• Using MT4 and MT5 at your discretion
• Tier 1 liquidity
• High leverage

Yes, you must complete the evaluation and a trial period, but the initial investment to get your audition can be easily covered when you succeed with E8 Funding. Anyone who knows how to trade forex and CFDs and is undercapitalized should have a look today.

7. Traders With Edge

Traders With Edge is one of the most popular prop trading platforms and a prop trader favorite because of its flexible and easily accessible trading features. Founded in 2022, a team of experts manages the platform, planning to fund up to 25,000 traders by 2025.

As a result of its unique structure, Traders With Edge offers:

• An 80% profit payout
• Diverse tradable assets
• The cheapest evaluation—challenge accounts starting from $55

There’s a comprehensive support structure that makes it easier for traders to get the information they need, along with core assistance on their accounts. There are several account sizes to choose from, and up to $3 million of capital could be accessible.

8. OneUp Trader

OneUp Trader provides a unique prop trading program for investors that makes it easier to get into the industry. OneUp partners with multiple prop trading firms in an effort to guarantee trading funds that could be as high as $250,000.

Using innovative and simple technology, you can take the 1-step evaluation that helps OneUp understand if you have what it takes. You don’t jump through hoops, and you also get:

• The opportunity to extract profit from the markets without spending your own money
• Several account styles
• Funds ranging from $25,000 to $250,000
• Accounts with specific risk parameters
• Placement with a funding partner when you pass the evaluation
• The chance to extract your first $10,000 in profit
• A 90% profit split after the first $10K

9. Trade the Pool

Most traders have an issue with getting into the markets because they lack the capital required to take risks and see massive returns.This is why traders turn to Trade the Pool. Trade the Pool does more than give you the funds you need to get into prop trading. Trade the Pool also:

• Works for day traders, swing traders and prop traders
• Support professional trader who need another place to work
• Offers trading for stocks and CFDs
• Offers support for inexperienced traders
• Provides unlimited buying power
• A 14-day free trial
• Offers over 12,000 stocks and ETFs to trade
• Educates users
• Subscribes traders to several resources
• Provides space for traders to hone their skills

Founded in 2022, Trade the Pool using reputable risk management tools and ensures that traders have a place to trade that serves both parties rather well.

An Investment Strategy to Meet Your Financial Goals

Overall, prop trading and hedge funds both involve a variety of strategies to make money. Prop traders is an investment vehicle that focuses on short-term gains and typically use leverage to maximize their profits. Hedge funds, on the other hand, may employ a wide array of strategies that seek to generate long-term returns.

Prop traders take risks by trying to outsmart the stock market in a short period of time, while hedge fund managers may take a more long-term view and be willing to wait out market cycles. Prop trading can be very lucrative, but the risks associated with it are also quite high. Hedge funds have lower risk levels, but may not provide the same potential for quick profits as prop trading.

Ultimately, both trading strategies offer unique opportunities for investors. Investors should carefully consider their goals and objectives before deciding which strategy is best for their needs.

Frequently Asked Questions