Noob question- I see a lot of SWEs and quants in Hedge Funds and HFTs. I was told they are operationally similar but fundamentally different. Can somebody ELI5 the difference in what they aim to accomplish, examples of firms in each and what a quant researcher does in both? TC:240k (post stock crash) YOE:6 #finance #hft
Hedge funds explicitly work on actively managing money where they can either short, leverage or trade assets more than normal fund managers. Hedge funds have single objective of beating the markets - most don’t succeed. HFT is a technique used by investment managers to make very quick trade. Some trades last just seconds. The primary objective is to exploit trade opportunities with expected profit of cents in very short time. This requires server co-location within the exchange itself. HFT can be used by a Hedge fund or any active investment fund. HFT needs super fast execution speed while Hedge Fund managers can make only trade for a year. Consider hedge funds in Forex markets - some funds just short one currency so as to protect their clients from losing money when things go wrong with that currency. Any large investment fund will have both the teams. Some doing HFT. Others making decade decisions. A Quant researcher’s job is to develop algorithms and optimisation techniques to solve for maximising Sharpe ratio. The difference would be time scale they operate on.
Ty!
This is mostly right, except hedge funds single objective isn’t to “beat” the markets, it’s to hedge against the markets in a variety of different ways so that in the event of poor market conditions they can still do well, and in bull markets they can still keep up. Doesn’t matter if they beat, as people with money in hedge funds also have money in the general markets. Hedge funds exist to offset losses in bad market conditions.
Most HFT not all are prop shop Some prop shop are HFT Hedge fund are generally not prop shop The line is getting blurred lately. But before you could distinguish prop shop and hedge fund in two strict different categories An hedge fund manage other people’s money and try to get outsized growth using varying techniques and being smarter than the rest of the market. They then earn money on fees they charge their investors Prop shop trade their own money A firm trading its own money is I would say in general more confident in the strategy it runs
HFT is a type of strategy (opposite of position taking) and hedge funds are a type of firm (opposite of prop shop). they are on orthogonal axes.
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Hedge funds are mostly in the business of raising money from investors, and preventing them from taking it out. The trading is secondary, and they mostly underperform the market after fees. HFTs are in the business of making good trades with their own money. Think, if you had a really good trading strategy, why would you let anyone else use it?
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ELI5: hedge funds get an advantage by being smarter than other investors. HFTs get an advantage by being faster than other investors.
There are three ways to make a living in this business: be first, be smarter, or cheat