A hands-on options curriculum covering real trading concepts. Read the lessons, work through examples, and test your knowledge.
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Lesson 4: 2.3: Hedge Funds & Proprietary Trading Firms
Delve into sophisticated, absolute-return focused private partnerships and prop shops trading with proprietary capital.
1. Absolute Returns & Alpha Generation
Hedge funds are private investment partnerships open to accredited or institutional investors. Unlike traditional mutual funds, they aim to generate absolute positive returns (Alpha) regardless of market direction.
To achieve this, hedge funds utilize sophisticated and aggressive strategies, including short selling, derivative leverage, event-driven arbitrage, and macroeconomic macro plays.
★ Key Concept: Hedge funds charge fees based on performance (e.g., 2% management fee and 20% performance incentive fee).
2. Proprietary Trading (Prop Shops)
Proprietary trading firms (prop shops) differ from hedge funds because they do not manage external client money. Instead, they trade the firm's own corporate capital directly.
Prop firms seek to capture short-term inefficiencies, arbitrage price gaps across exchanges, or utilize highly quantitative algorithms, keeping 100% of trading profits inside the firm.
Click to enlargeKNOWLEDGE RECONNAISSANCE
How do hedge funds differ from traditional mutual funds?
What capital does a proprietary trading firm risk when executing trades?
More lessons in this module
- 2.0: Overview of Market Participants
- 2.1: Retail Investors & Traders
- 2.2: Institutional Investors (Mutual/Pension Funds)
- 2.4: Investment Banks & Underwriters
- 2.5: Market Makers & Liquidity Providers
- 2.6: Central Banks & Monetary Policy
- 2.7: Brokers & Financial Intermediaries
- 2.8: Regulators & Market Oversight (SEC, CFTC)
- 2.9: Sovereign Wealth Funds
- 2.10: High-Frequency Trading (HFT) & Algorithmic Firms
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