In the investment world, we can offer different modalities to investors through brokers. Today we will compare Prop Trading vs Hedge Fund modalities so that you know their potential and which one you should offer to your clients.

Prop Trading: Increased gain through control

Prop Trading, or proprietary trading as it is also known, is where a company puts its capital to make the required investments. Unlike investment funds, where each partner contributes capital, here the company provides the funds.

This has many advantages: if your clients are trading with their own money, they do not have to split the profits. In prop trading, almost all the returns from the various investments go back to the company; there is no limit on potential earnings since the profits are not shared among multiple people.

Prop trading characteristics

Although the company provides all the capital, it does not invest directly. For that, the company recruits experienced investors, whom it tests beforehand to evaluate their capabilities. If the investors pass the test, they receive authorization to manage funding accounts with real money from the company.

Prop trading is quite attractive to ordinary investors as they do not have to put up money to generate profits for themselves. Instead, by trading with other people’s money, they can earn commissions per trade which, although not as high as if they had put up capital, allows them to make profits without risking anything.

Because this low-risk model is so attractive to investors, the demand for brokers who can provide the platforms and technologies necessary for prop trading is growing exponentially.

However, when comparing prop trading with hedge funds, we observe distinct differences between the two practices.

One of them relates to the controls and rules applied when making investments. And the fact is that prop trading is very controlled, and each step taken is strategically designed to generate the highest possible profit.

The companies that provide the capital will want to avoid losses as much as possible; that is why, even if they have expert investors, they can establish as many rules as required to ensure the success level of each investment.

Investors, in turn, will have to adhere strictly to the company’s rules to remain authorized to manage the company’s money.

Pros and cons

Considering all the above, we can say that prop trading has the following advantages:

• High investor demand.
• Greater control over the capital invested.
• Planned strategies to increase the profitability of each transaction.
• Less risk for investors.
• Great returns for the company that provides the capital.

It is also worth mentioning the disadvantages of prop trading:

• High investment in both technology and capital to invest.
• The success of each investment is not guaranteed.
• Lower returns for investors.

Hedge Fund: Increased profitability through alternative investments

Now, we must turn to the other side of prop trading vs. hedge funds; this, unlike prop trading, is a fund that gathers capital from various partners for different transactions.

The Hedge Fund is a high-risk investment method with ample return potential; however, it differs significantly from most traditional investment methods, including prop trading.

Hedge Fund Characteristics

The objective of the hedge fund is to generate the highest possible return regardless of market trends and fluctuations.

Thus, those who manage the fund’s capital not only invest in assets that are rising or that have upward trends in the medium to long term. Instead, they invest in all types of assets, even in bear markets, where investing would typically be considered illogical.

This risk is offset by the ample freedom given to the investor to develop successful strategies and decide how to manage the capital to generate the highest profit. In other words, the equity manager is not subject to the regulations and rules generally associated with traditional investments.

Hedge funds may have a single or multiple managers or use replication practices to generate returns. Those who invest capital in these funds know they are high-risk investments, and due to the lack of regulations or controls, they may lose their entire investment.

To mitigate this risk, hedge fund managers are often investors with extensive experience and a successful track record. Nevertheless, investing in different funds without considering market variations presents challenges that all participants must face.

Pros and cons of the Hedge Fund

These are some of the advantages of offering Hedge Fund services:

• The investment in platforms and capital for investments is lower.
• Managed by trusted investors and prepared to generate higher profitability.
• Investors can generate profits regardless of market fluctuations.
• Greater freedom for investment strategies without ties or strict controls.

Keep in mind the following disadvantages:

• Hedge funds are riskier because they do not consider market variables.
• If you do not have experienced investors, you cannot apply for the Hedge Fund.
• It is a less popular service than prop trading, so it is not in such high demand.

Smart Broker Solutions: Technology to set up your broker in record time

Now that you know prop trading vs hedge fund and regardless of which investment practice you use, as a broker, you must be able to serve your clients the best platforms to invest safely and reliably.

At Smart Bróker Solutions, we offer the assistance you need to adopt the necessary platforms and technologies to operate. We help you create your broker from scratch if needed, handling administrative protocols and providing prompt responses.

Whether you want to offer prop trading services at Smart Broker Solutions, or hedge fund services, we help you get your business up and running and get you off to a solid start from day 1.

Contact us at Smart Bróker Solutions; we look forward to providing you with all the guidance you need.