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Hedge Funds (Traditional)
Only allow accredited investors & institutional investments, typically older investors looking for passive investments to grow their wealth.
Investors are LP’s (limited partners) and ONLY provide investment capital and don’t make investment decisions.
Investors are passive as all LP’s pool their money which becomes the firm’s investment capital.
Hedge funds make investment decisions on behalf of their LP’s following their existing strategy / methodology. Hedge fund managers often have decades of experience.
Gains/losses are shared across all LP’s and the fund manager collects quarterly/annual fees based on performance.
Hedge funds charge 1.5 - 2% of capital under management + 20% incentive fees annually. (varies by firm)
Typically invest longer term than trade desks and invest in anything from futures, forex, stocks, commodities, bonds, etc.
Trade Desks (Prop Firm)
Trade desks provide up-and-coming traders with trading capital (often/not always) based on capital they bring to the firm (a trader bring $10k to a trade desk, but working with a trade desk, has $100k buying power). NOTE: $10k is well below the PDT minimum of $25k, but allows a trader to power boost their capital.
Not all trade desks require up front capital, however, if the desk fronts it all, they will take a larger portion of profits and charge monthly desk fees.
Gains are shared with the firm, negotiated in advance, but something like a 70/30 split. (you keep 30% of gains) but losses all belong to you and reduce your original capital.
You pay monthly fees for the desk and are required to pay for some software / data tools that are expected to be paid from your split.
Trade desks typically interview potential traders and are accepted like applying for a job — reviewing your previous trade history & interview you — if accepted, you join a small team/pod of 3–6 people at the firm’s office.
Investments are active — as in it is 100% up to you to grow your capital.
Trade desks typically offer training / education programs for their traders. Risk parameters of max daily/weekly loss is set to control loss of capital.
Typically more of “traders” than “investors” — shorter term holding periods of minutes and hours (think day trading), rarely allowed to hold trades overnight.
Desk traders have some older traders, but it’s mostly the younger traders that have very high turnover, desk traders are sometimes given a small salary if they survive after the 1st year — most don’t survive even a year, 90% failure rate.
These profit splits and monthly fee requirements are slanted in the favor of the trade desk and make it tough to survive long term—even with superior gains.