A Comprehensive Comparison Between Prop Trading and Hedge Funds: What Are The Differences?

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Date of Release : 2023/10/11

Do you want to invest money in financial markets and make a profit? Are you familiar with different types of trading and funding programs?

Here we will talk about two famous approaches: hedge funds and prop trading!

Both of them are key players in the world of finance!

While hedge funds and prop trading play significant roles in finance, they differ in several aspects.

This blog aims to compare hedge funds and prop trading in order to determine the differences between them.

Usually, to compare two things, it is good to know the definition of each first. This way, we can provide the base knowledge for you to understand distinctions better.

Therefore, let’s explore prop trading first and learn more.

What is The Definition of Prop Trading?

Let’s explain it simply!

Prop trading is a program in which a prop firm provides capital for traders to sell and buy assets on their behalf! The goal is to make a profit that will be split between both parties: the trader and the firm.

Several companies offer these programs and are actively seeking skilled traders to partner with.

When a trader faces financial troubles and does not have enough money to invest in trading, the best option is to join a prop trading platform.

It’s obvious that the more capital a trader invests, the greater the potential profit in successful trades. Therefore, all talented traders wish to have considerable capital in hand to initiate trading.

Please note that if you’re a beginner trader trying to level up, avoiding prop trading platforms is better. As the company is going to fund you, they will make sure you’re capable and worth working with before initiating.

Unfortunately, amateurs may not pass the qualification phase most of the time. Even if they succeed, after failing to accomplish predetermined goals in the contract between the firm and trader, the funding firm will stop providing them required tools and capital. Let’s be frank: the firm will terminate the partnership!

Hence, if you are a capable trader with a proven profitable strategy and are in shortage of money to invest for trading, look for a prop firm to get funded and trade on their behalf.

Now let’s move further and explore hedge funds meaning!

What Does ‘Hedge Funds’ Mean Exactly?

First, let’s find out the reason for naming!
It’s called ‘hedge funds’ because they are designed to hedge against market downturns. Its goal is to make money by utilizing various strategies, even when traditional investments are losing value!

So, what exactly does the concept of hedge funds entail?

Avoiding any complexity, hedge funds occur when a group of private investors form a limited partnership, in which they give their capital to a professional fund manager! This person has the duty of employing different strategies and techniques to profit from the initial capital.

Hedge fund managers have the flexibility to employ a wide range of strategies and choose how they invest in different assets.

It’s crucial to understand that the minimum investment required to join such programs is usually higher than regular. Therefore, this kind of plan targets wealthy clients to collect enough capital to start the process.

Also, prospective investors should verify the fund manager’s qualifications.

They are responsible for all the efforts to increase the profit and maintain a positive account balance, keeping every investor happy and satisfied. On the opposite, if anything goes wrong and losses occur, the fund manager is the one who takes all the blame.

Even now, you can tell the differences between hedge funds and prop trading, but let us compare on your behalf. You just keep reading.

What Are The Differences Between Hedge Funds and Prop Trading?

These two concepts of the financial world differ from various angles and have some key distinctions!

Let’s break down this section to have a comprehensive comparison.

Source of Capital

As mentioned earlier in the blog, hedge fund programs progress with outsider’s money. This means a group of private investors gather and put their capital in a pool of money controlled by a fund manager, who is responsible for making a profit with collected money. So, the investment comes from outside sources.

While in prop trading, a financial institute, particularly a prop firm, provides the required money to invest in various markets. These firms will fund capable traders to do the job on their behalf and make a fortune out of it.

Hence, inside money comes in as an investment in prop trading programs.


Hedge funds are more regulated than prop trading!

It’s absolutely normal. The investors must ensure that they give money to trusted people, so there must be rules and conditions defining different aspects of the job and forecasting all possible situations.

Prop trading, on the other hand, has fewer regulations. But it does not mean that there are none!

Even when a prop firm provides the required funds, it aims to ensure that only talented traders with proven profitable strategies join the program. So, specific rules and regulations define each stage of the partnership.

But generally, as we said at the beginning of this section, hedge funds seem more regulated than the other party, prop trading.

Fee Structure

While defining hedge funds earlier in this blog, we mentioned that fees are higher than other methods in this program. When it comes to comparing hedge funds and prop trading, it is one of the most significant differences.

Hedge funds usually charge two fees, which are management fees and performance fees. The first is a percentage of the fund’s assets, paid even in case of losses. In a way, this fee serves as the fund manager’s compensation.

The second one, the performance fee, is a percentage of the fund’s profit. It’s paid only when profits are generated.

In prop trading, firms only charge traders performance fees, as there are no outside investments, and all the capital comes from the prop firm.


Hedge funds are riskier by nature. The fund manager utilizes collected capital in such programs to invest in various assets. Additionally, hedge funds employ more complex investment strategies, which can lead to higher risk.

However, prop trading aims to minimize transaction risks, as all prop firms encourage prospective traders to use risk management strategies in their trading process. Remember that prop trading focuses on fewer markets and assets; therefore, the risk decreases.

As we mentioned several times, the main difference is about the source of capital. In prop trading, the firm gives traders money to trade on their behalf, so, predictably, they do all they can to minimize losses. In hedge funds, wealthy investors entrust their entire capital to a fund manager, who bears the responsibility for all investment decisions.

It’s time for a conclusion.

Which Path Suits You Best: Hedge Funds or Prop Trading?

Answering this question is so easy!

If you have a lot of money and want to invest in financial markets without doing the hard job, meaning buying and selling at the right time, hedge funds are one of your best options!

However, if you are a capable trader in a shortage of capital, it’s better to opt for a prop trading program and try to join a prop firm after qualifying your skills.

Now let us introduce a prop firm for those who want to take the second approach. Propiy is one of the best prop firms offering a significant profit percentage to their trader partners, which is the highest in the market.

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