If you're thinking about joining a prop firm like a No Challenge Prop Firm, you're likely to have some questions first. Joining a proprietary trading firm can be a great way to kickstart your trading career and boost your skills, but it's important to know what you're signing up for. Not only do prop firms come with their own rules and cultures, but they also differ from hedge funds in several ways. Understanding these differences can help you find the right fit for your trading goals. In this guide, we'll break down the fundamental differences between prop trading and hedge funds so that you know exactly what to expect.
Goat Funded Trader’s prop firm is like a hedge fund for traders, but with less structure and more opportunities for individual growth. Joining Goat Funded Trader can help you understand the differences between prop trading and hedge funds while boosting your trading career.
What is Prop Trading?

Prop trading, short for proprietary trading, is a practice where a financial firm uses its capital to trade various financial instruments such as stocks, currencies, bonds, commodities, and cryptocurrencies to generate profits. Unlike traditional trading, where clients invest their money, prop trading involves the firm’s money, exposing it to both potential gains and risks under regulatory oversight.
In prop trading, experienced traders are given access to significantly larger amounts of capital than they might personally have. These traders execute speculative trades aiming to capitalize on market opportunities. Typically, traders earn a share of the profits generated, often taking a portion of the commissions from successful trades. This model incentivizes skilled traders to perform well while managing risk carefully.
One notable example in the prop trading space is Goat Funded Trader, a proprietary trading firm established in 2023 and headquartered in Hong Kong. Goat Funded Trader provides traders access to simulated accounts with capital up to $2 million, covering a wide range of assets including over 1,300 forex pairs, 14,000 stocks, 21,000 ETFs, and 1,500+ crypto pairs. The firm emphasizes a sustainable and reliable trading environment, backed by proprietary technology, which allows traders to trade flexibly during news events, hold positions overnight or over weekends, and utilize automated trading strategies via Expert Advisors (EAs).
Goat Funded Trader offers various evaluation challenges (1-step, 2-step, and 3-step) that traders must pass to access funded accounts. The firm also provides instant funding options. The firm also supports quick payouts, sometimes within hours, and maintains 24/7 customer support, making it a popular choice among over 98,000 traders worldwide.
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Goat Funded Trader gives you access to simulated accounts up to $800K with the most trader-friendly conditions in the industry - no minimum targets, no time limits, and triple paydays with up to 100% profit split. Join over 98,000 traders who've already collected more than $9.1 million in rewards, all backed by our 2-day payment guarantee with a $500 penalty for delays. Choose your path to funding through customizable challenges or start trading immediately with our instant funding options. Sign up to Get Access to up to $800K Today, and 25-30% off.
What is a Hedge Fund?
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Hedge funds are investment vehicles that gather capital from accredited investors and institutions to pursue active returns. Unlike traditional mutual funds, hedge funds have far greater flexibility in their investment choices, often employing leverage, derivatives, short selling, and arbitrage techniques to generate profits regardless of market conditions. Hedge funds are typically structured as limited partnerships or offshore corporations, where investors act as limited partners providing capital. In contrast, the general partner or investment manager oversees the fund’s operations and investment decisions.
This manager is responsible for crafting and executing strategies designed to maximize returns while managing risk. The manager usually earns a management fee (commonly around 2% of assets under management) plus a performance fee (often 20% of profits), a compensation model known as "2 and 20."Hedge funds actively trade a broad range of assets, including equities, bonds, currencies, commodities, and derivatives. Strategies may include long/short equity positions, global macroeconomic bets, merger arbitrage, and convertible bond arbitrage.
Hedge funds also frequently use leverage, borrowing capital to amplify potential gains, which also increases risk exposure. Risk management is a critical component of hedge fund operations. Managers employ diversification, hedging, stop-loss orders, and continuous market monitoring to protect investor capital. Despite these efforts, investing in hedge funds carries inherent risks, and investors must place trust in the expertise and judgment of hedge fund managers. The best managers build strong reputations by consistently delivering returns and managing risk effectively.
Operationally, hedge funds rely on service providers, including prime brokers who facilitate trade clearing, financing, and custodial services; administrators who handle valuation, accounting, and investor relations; and auditors who ensure transparency and regulatory compliance. This infrastructure allows managers to focus on investment strategies while maintaining operational integrity.
Prop Trading vs Hedge Fund
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Capital Sources and Funding
Proprietary trading firms use their capital to fund trading activities. They provide traders with firm capital to execute trades, meaning the firm directly absorbs all profits and losses. Traders in prop firms typically gain access to substantial capital after proving their skills, and profits are shared between the trader and the firm. This model enables traders to leverage firm resources without incurring upfront risk to their capital.
In contrast, hedge funds pool capital from external sources, including private investors, corporations, and institutional clients. The fund manager invests this aggregated capital in various assets to generate returns for investors. Profits and losses are shared among investors, not the fund manager personally, though managers earn fees based on assets under management and performance. This external capital source creates a different risk and accountability structure compared to prop trading.
Fee and Compensation Structures
Hedge funds typically operate on a "two and twenty" fee model: charging a 2% management fee on assets under management plus a 20% performance fee on profits generated. This fee structure has evolved recently, with some funds lowering their costs to stay competitive; however, it remains a primary revenue source for hedge fund managers.
Prop trading firms, on the other hand, do not charge management fees since they trade with their capital. Instead, they split the profits generated by traders and may charge initial application or deposit fees. Traders earn a portion of the profits they generate, creating a direct performance-based compensation model closely tied to individual trader success.
Accountability and Regulation
Hedge funds are accountable to their investors because they manage external capital on behalf of their investors. This accountability necessitates greater transparency, regulatory compliance, and investor protections. Hedge funds are often required to register with regulatory bodies, such as the SEC, once they exceed certain asset thresholds. They are then subject to detailed scrutiny regarding disclosures and risk management.
Prop trading firms are primarily accountable to themselves, as they trade with their capital. This means they generally face lighter regulatory oversight and fewer public reporting requirements. The reduced regulation allows prop firms more operational flexibility but also places the financial risk squarely on the firm itself.
Risk Profiles and Investment Strategies
Prop trading typically involves a higher risk tolerance because firms use their capital and often employ aggressive trading strategies, including the use of leverage and options. The risk is concentrated within the firm, and losses directly impact its financial health. Prop traders often focus on short-term trading horizons and technical analysis, avoiding holding positions overnight or over weekends to manage risk tightly.
Hedge funds also engage in high-risk investments, but they typically emphasize striking a balance between risk and reward to protect investor capital. They employ diverse strategies, including both short- and long-term investments, and actively practice risk management to safeguard the fund and its investors. Hedge funds’ risk tolerance varies depending on their investment mandates and client expectations.
Similarities Between Prop Trading and Hedge Fund

Profit Generation
Proprietary trading firms and hedge funds exist primarily to generate profits through financial market activities. Even though prop firms and hedge funds have different funding sources, their ultimate goals align. While prop firms trade using their capital, hedge funds manage funds from external investors. In either case, the goal is to increase their financial positions and deliver positive returns. To motivate performance, both entities implement incentive structures that reward profitability, such as performance-based pay for traders and managers. They also aim to reduce trading-related costs to maximize net gains.
Utilization of Similar Investment Strategies
As businesses that generate profits through trading, prop firms and hedge funds often employ comparable trading strategies and tools across various asset classes, including stocks, currencies, futures, and options. Both can take long or short positions and may engage in trend-following, arbitrage, market-making, and statistical analysis. While prop trading tends to focus more on short-term trades, hedge funds often combine short- and long-term approaches; however, the underlying techniques, such as technical analysis, algorithmic trading, and fundamental event-driven strategies, overlap significantly. This strategic similarity allows both to capitalize on market inefficiencies and volatility.
Risk Mitigation Focus
Both prop trading firms and hedge funds invest considerable effort into managing and mitigating risk to protect capital and ensure sustainable profitability. They implement risk controls such as diversification across asset classes and markets, setting trading limits, and employing sophisticated risk management systems. While hedge funds must balance risk according to investor mandates and regulatory requirements, prop firms manage risk directly on their capital, often taking aggressive but calculated risks supported by leverage and real-time data analysis. This shared emphasis on risk management is crucial to their operational success.
Global and Multi-Asset Operations
Both prop trading firms and hedge funds operate across multiple asset classes and geographic markets. For example, U.S.-based prop firms and hedge funds alike may trade foreign equity index futures such as the UK FTSE 100. This global reach and asset diversification enable them to exploit a wide range of opportunities and hedge exposures effectively, enhancing their ability to achieve positive returns regardless of specific market benchmarks.
Performance-Driven Compensation
The compensation models in both prop trading and hedge funds are closely linked to performance outcomes. Prop traders typically receive a share of the profits they generate, incentivizing them to maximize returns. Hedge fund managers earn management fees based on assets under management and performance fees tied to profits, thereby aligning their interests with those of investors. This performance-based pay structure fosters a strong profit orientation and encourages active risk-taking within controlled limits.
Making the Right Choice

Making the correct choice between proprietary (prop) trading and hedge funds depends mainly on your financial goals, risk tolerance, and trading style. Proprietary trading firms use their capital to trade actively in the markets. They typically focus on short-term opportunities, employing advanced technology and strategies to capitalize on quick price movements.
Prop traders often engage in day trading or high-frequency trading, aiming for rapid gains. The profits generated are split between the trader and the firm. Because prop firms trade with their own money, they tend to take on higher risks, but this also means potential for higher rewards. Regulation on prop firms is generally lighter compared to hedge funds, giving them more operational flexibility. Hedge funds, in contrast, pool money from external investors, including institutions and high-net-worth individuals.
They employ a diverse range of investment strategies, often combining short-term and long-term positions across various asset classes, including stocks, bonds, derivatives, and real estate. Hedge funds aim to balance risk and reward over time, delivering steady returns to their investors. They charge management and performance fees and are subject to stricter regulatory oversight due to their use of outside capital. Hedge funds typically have less liquidity, with lock-up periods restricting investor withdrawals.
Choosing between the two depends on your preferences:
- If you are a skilled trader who thrives on fast-paced, short-term trading and prefers a performance-based compensation model, prop trading might be suitable.
- If you seek more stable, long-term investment opportunities and are comfortable with less direct control over trades, hedge funds may be a better fit.
Both paths offer unique opportunities but require careful consideration of your goals, risk appetite, and desired level of involvement in trading decisions.
Get 25-30% off Today - Sign up to Get Access to Up to $800K Today

Goat Funded Trader is a prop trading firm that offers traders access to a simulated account with up to $800,000 in buying power. The company is recognized for its user-friendly conditions, which enable traders to thrive. The main account features include no minimum targets, no time limits, and a profit split that can go as high as 100%. The firm has paid out over $9 million to traders since opening in 2021. Sign up to Get Access to up to $800K Today, and 25-30% off.