Prop Trading vs. Hedge Funds

Prop trading. Hedge funds.  

You might be familiar with these terms, but do you know what they mean? If not, don’t fret – it’s easy to confuse prop trading and hedge funds. To dispel the confusion, here’s how they’re similar – and how they differ.  

What Is a Prop Firm?

Let’s start with prop firms. What is a prop firm, in the simplest terms? 

Proprietary firms, or “prop” firms, are financial companies. They give traders access to simulated funds to buy and sell assets including: 

• Commodities
• Stocks 
• News 

There’s no risk to the trader, since they’re not using their own capital. The prop firm provides the funding. In exchange for offering access to trading tools, the prop firm receives a percentage of any profits generated.  

What’s an example of a prop firm? Consider Maven Trading, for example. With our help, traders access markets and leading analytical tools to help them grow. And in return, we ask for a percentage of the profits you generate.  

What Is Prop Trading?

Prop trading is when a trader – usually a day trader – joins a prop firm. The trader follows the prop firm’s trading rules, makes trades and, hopefully, turns a profit.  

Prop trading is exhilirating. It’s exciting. No two days are ever the same. Although it takes some skill to be a successful prop trader, we believe it’s worth the effort.

How Prop Trading Works

Let’s break down how prop trading works in a little more detail.   

• Traders attempt one or two “challenges”. Completing the challenge(s) shows that you have the skills the prop firm is looking for. Or, open an instant funding account and start trading right away.  
• Once the challenge stage is complete, traders are verified. This involves a “know your customer” (KYC) email which helps us confirm your identity, and an assessment to make sure that all trading restrictions were kept.  
• Upon approval, you have permission to trade! The prop firm provides the account and the simulated capital. You can start trading.  

Follow the prop firm rules, and you can keep trading as long as you want! At Maven Trading, you can keep up to 80% of your profits from successful trades.

What Is a Hedge Fund?

We’ve explored how prop firms work. What about hedge funds?  

A hedge fund is an investment arrangement, or partnership. Asset managers run the fund and decide how to invest it.  

You’ll often find wealthy individuals investing in hedge funds to build their portfolios. It is not available to everyone – investors must normally be SEC-accredited. This means they have a net worth of at least $1 million.

How Hedge Funds Work

Confused about how hedge funds work? Let’s consider an example.  

• Investors pool their money together and entrust it to a manager(s). Together they form a legal partnership.  
• This manager gets paid based on their performance. So, the more successful the trades, the more they get paid.  
• Investors pay fees in exchange for accessing the hedge fund.  
• There are complex rules for when you can withdraw and buy into hedge funds. Normally, you’re restricted to certain times of the year. 

What Is the Difference Between Prop Trading and Hedge Funds?

Now, we’re clear on prop trading vs. hedge funds. Let’s summarize the key similarities and differences.

The Similarities

• Prop firms and hedge funds are both ways to invest and grow a profit. 
• You can invest in many types of assets, from Forex to stocks.  
• Both hedge funds and prop firms use a wide range of investment strategies to make money.  

The Differences

• Prop firms use their own simulated capital to fund trades. Hedge funds use funds from customers or outside investors. Hence why they’re called “funds” – they’re literally funded by outside sources.   
• Prop firms let you withdraw – or open an account – at any time. Hedge funds restrict how easy it is to buy in or exit.  
• Hedge funds make money by charging performance and management fees. Prop firms make money through talented day traders.  

Which Is Better: Prop Trading Firms vs. Hedge Funds

If we compare hedge funds vs. prop shops – which is “better”? There is no simple answer to this question. However, here are some points to bear in mind.  

• Hedge funds may rely on risky investment strategies to make money. After all, the better the returns, the higher the management fee. This could lead to significant losses, though.  
• Prop firms are more accessible to talented traders, regardless of net worth. Hedge funds are far more exclusive and expensive to buy into.  
• Prop firms can exercise more independence than hedge funds. Why? Because there’s less formal “red tape” or regulation. 

Choosing Between Hedge Funds and Prop Trading

Hedge funds vs. prop trading – which one is right for you? Well, it all comes down to what you want from your trading journey. 

• Prop firms typically work with day traders. Day traders focus on short-term price swings. They make multiple traders during market hours. If this style of trading appeals to you, then consider prop firms.  
• Hedge funds are, frankly, inaccessible to most people. There are less expensive alternatives, like mutual funds, but they are still costly. 
• Hedge fund managers may take risks that you’re uncomfortable with. But since prop firms use their own simuated capital to fund trading, they are cautious. That’s why they ask traders to complete challenges before joining the trading pool.  
• Prop firms give you a significant amount of control over what assets you invest in. Hedge fund investors don’t have this level of independence – the managers make the calls.   

If you have the basic trading skills and the passion to succeed, prop firm trading could be for you. 

Start Your Trading Journey at Maven Trading

Have you decided to try prop trading? Then we want to hear from you.  

Maven Trading, a leading prop firm, is always keen to hear from talented, ambitious traders. We give you the simulated capital and a demo account. You do what you do best – trade. As you grow and learn, you’ll have the chance to profit!  

It is easy to start. Opt for an instant funding account or try our challenges. Pass the challenges, and we can set you up with a demo account. Start your trading journey – make your choice today!