Prop Trading vs Hedge Fund: What Is the Difference?
Prop trading vs hedge fund is a comparison between two very different ways to trade with money that is not your own. This guide explains…
Prop trading vs hedge fund is a comparison between two very different ways to trade with money that is not your own. This guide explains whose money each one uses, who can join, how traders are paid and which rules apply.
What Prop Trading Means
Prop trading is short for proprietary trading. The term is used in two different ways.
In-House Prop Desks
Some financial firms trade their own money to make a profit for the firm. The traders on these desks are employees of the firm. They do not trade money from outside investors.
Funded Account Prop Firms
A funded account prop firm works in a different way. You pay a fee to take an evaluation. If you meet the evaluation rules, you receive a funded account to trade, under the firm’s rules.
If you make a profit and follow the rules, you can receive a share of it. This share is called the performance split. You are not an employee of the firm.
In this article, “prop trading” means the funded account model unless stated otherwise.
What a Hedge Fund Is
A hedge fund is a private investment fund. It collects money from investors and invests it, with the aim of making a positive return. A manager runs the fund and makes the investment decisions.
In the United States, hedge funds are limited to investors who meet set rules on income, assets or financial knowledge. These include accredited investors. Investors in hedge funds include pension funds, insurance companies and wealthy people. Hedge funds are not sold to the general public.
Investors pay the manager a fee based on the amount of money in the fund. They can also pay a share of any profits. You can read more in the SEC’s guide to hedge funds.
Prop Trading vs Hedge Fund: Side by Side
| Funded account prop firm | Hedge fund | |
|---|---|---|
| Whose money | An account the firm provides, under its rules | Money from the fund’s investors |
| Who can join as a trader | Anyone who meets the firm’s terms and passes the evaluation | Staff hired by the fund |
| How you get in | Pay a fee and pass an evaluation | Apply for a job |
| How traders are paid | A performance split of profits | Salary, and in some roles a bonus |
| Main rules | Loss limits and trading rules set by the firm | Investment limits set by the fund and its investors, plus financial law |
| Who carries the loss | You lose the evaluation fee, and the account if you break the rules | The fund’s investors |
Whose Money Is at Risk
At a hedge fund, investors put in the money. If the fund loses, the investors lose. The manager is responsible for how that money is invested.
On a funded account, you trade an account the firm provides. Your own money at risk is the evaluation fee. If you break the account rules, you can lose the account.
In both cases, losses are possible. Neither model removes risk. It changes who carries it.
How You Get In
Getting Into a Hedge Fund
A role at a hedge fund is a job in finance. You apply, and the fund chooses who to hire. A fund can ask for a finance degree, work experience or extra qualifications.
Getting a Funded Account
A funded account is open to traders who meet the firm’s terms. You choose a program, pay the fee and trade an evaluation account. If you meet the evaluation rules, you receive a funded account.
Neither path is guaranteed. A hedge fund may not hire you. You may not pass an evaluation.
How Traders Get Paid
At a Hedge Fund
People who work at a hedge fund are employees. They can be paid a salary. Some roles also include a bonus linked to results.
The fund itself earns money from fees paid by its investors.
On a Funded Account
You do not receive a salary. If your funded account makes a profit and you follow the rules, you can request a payout. Your payout is your performance split of that profit.
If there is no profit, there is no payout. A funded account is not a job with a fixed income.
Rules and Risk Limits
Funded Account Rules
Each funded account program has its own rules. These can include loss limits, which set how much the account can lose. If the account goes past a loss limit, the rules are broken. Read the rules for the exact program you choose before you trade.
Hedge Fund Rules
A hedge fund has limits set by its own strategy and its agreements with investors. It must also follow financial law in the places where it operates. In the United States, hedge funds are not subject to some of the rules that protect investors in public funds.
How Strategies and Time Frames Differ
At a Hedge Fund
Hedge funds can use more flexible strategies than many other types of funds. A fund can invest in shares, bonds, currencies and other assets. It can hold some positions for weeks, months or longer.
The fund’s strategy is set by its managers and its agreements with investors. A single trader at the fund works inside that strategy.
On a Funded Account
On a funded account, you trade the instruments your account offers. You choose your own setups and your own trading style, inside the program rules.
Loss limits shape how you trade. Your stop loss and trade size need to keep each loss inside your plan and inside those limits.
What Each Path Looks Like Day to Day
A Day at a Hedge Fund
Hedge fund staff work as part of a team. A day can include research, meetings and reports to managers. Decisions can pass through several people before a trade is placed.
A Day on a Funded Account
On a funded account, you work alone. You choose when to trade, within the program rules. You plan your trades, track your results and keep a trade journal.
Nobody checks your work during the day. The account rules apply to every trade, so you need to track your losses against them yourself.
Which Path Fits You?
Answer these questions to see which path matches your situation.
- Do you want a job or an account? A hedge fund role is employment. A funded account is a trading arrangement under rules.
- Do you have finance qualifications or work experience? Hedge fund roles can ask for them. A funded account evaluation does not.
- Can you follow fixed loss limits? A funded account has set rules on losses. Breaking them can end the account.
- Do you need a fixed income? A funded account pays only from profits. If you need a salary, a funded account cannot replace it.
- Do you have a trading record? Review your trade journal. It shows how you trade under your own rules before you take an evaluation.
Where FXIFY Fits
FXIFY is a broker-backed prop firm that offers funded forex and CFD accounts. It is a funded account prop firm, not a hedge fund.
You choose a program, take an evaluation and trade under that program’s rules. Each FXIFY program lists its own rules and loss limits on the FXIFY programs page.
FAQ
Is a Prop Firm the Same as a Hedge Fund?
No. A hedge fund invests money from its investors. A funded account prop firm gives traders an account to trade under its rules, after an evaluation.
Do I Need My Own Money to Start?
For a funded account, you pay an evaluation fee. You do not deposit trading capital. To invest in a hedge fund, you need to meet the fund’s investor rules and invest your own money.
Are Prop Firms Regulated Like Hedge Funds?
They are different businesses, so different rules apply. A hedge fund manages money for investors. In a funded account program, you pay a fee for an evaluation, and you do not invest money with the firm. Before you join any firm, read its terms and check where it is registered.
Is a Funded Account a Way to Start a Trading Career?
A funded account lets you trade under fixed rules without depositing trading capital. It can help you build a trading record. It does not promise income, and there is no payout without profit.
Which Path Has Less Risk?
Neither path is free of risk. At a hedge fund, the investors carry the losses. On a funded account, your evaluation fee is at risk, and you can lose the account if you break the rules. Only pay a fee you can afford to lose.
Can a Prop Trader Later Work at a Hedge Fund?
It is possible, but there is no set route. A hedge fund chooses its own staff. A trading record can be part of your experience, but it does not lead to a hedge fund job on its own.
