Proprietary Trading & Fund Management – Investors, Limited Partners & General Partners: A Strategic Approach to Funds, Including Tax Considerations

Introduction

The financial industry has seen an increasing convergence between proprietary trading firms and fund management entities. Proprietary trading firms use their capital for short-term market opportunities, while fund managers operate with external capital from Limited Partners (LPs), seeking risk-adjusted returns over time. Understanding their distinctions, collaboration potential, and tax implications across different jurisdictions is crucial for efficient capital allocation and sustainable investment structures.

In this article, we explore the key differences between proprietary trading and fund management, the LP-GP investment structure, strategic fund allocation, and taxation frameworks in the UK, Singapore, Thailand, and Australia.

Tax Disclaimer: The information provided in this article is based on personal understanding and general knowledge at the time of writing. Tax regulations and financial policies are subject to change and may vary based on individual circumstances and jurisdictions. Readers are strongly encouraged to verify any details with official sources or consult a qualified tax advisor or financial professional for personalised advice. Neither the author nor the publisher assumes any responsibility for decisions made based on the information presented herein.

1. Proprietary Trading vs. Fund Management: Understanding Their Distinct Objectives and Collaboration Potential

Proprietary Trading Firms: Self-Funded, High-Speed Market Engagement

Proprietary trading (prop trading) firms deploy their capital, focusing on short-term profit opportunities using arbitrage, statistical models, and high-frequency trading (HFT). Since they do not manage external investor funds, they have complete control over their strategies and leverage usage.

Key Characteristics of Proprietary Trading:

• Self-Funded: No third-party investors, eliminating fiduciary duties.
• Short-Term, High-Frequency Strategies: Market-making, arbitrage, and algorithmic trading.
• Higher Leverage & Risk Appetite: Often rely on derivatives to enhance returns.
• No Redemption Pressures: Unlike funds, prop firms do not have to accommodate investor withdrawals.

Fund Management: Structured Capital Allocation with Investor Mandates

Fund managers raise capital from investors such as institutions, family offices, and high-net-worth individuals. Operating under a structured investment mandate, fund managers seek long-term capital appreciation while managing risk.

Key Characteristics of Fund Management:

• External Investor-Funded: Operates with LP capital, subject to fund terms.
• Regulatory Oversight: Adheres to SEC (USA), FCA (UK), MAS (Singapore), ASIC (Australia), and other financial regulators.
• Long-Term Strategies: Engages in diversified asset allocation with defined risk frameworks.
• Performance-Linked Compensation: Fees are based on management and fund performance (e.g., "2 and 20" model).

Collaboration Potential Between Prop Trading Firms and Fund Management

While traditionally separate, proprietary trading and fund management firms increasingly collaborate through:

• Co-Investment Structures: Hedge funds allocate capital to prop trading desks for enhanced alpha.
• Liquidity Provision: Prop firms act as liquidity providers for large institutional trades.
• Hybrid Funds: Integrating systematic prop trading models within a hedge fund framework.

2. Key Roles: How LPs as Capital Providers and GPs as Fund Managers Create a Seamless Ecosystem

Limited Partners (LPs) – Capital Providers

LPs include pension funds, family offices, endowments, and ultra-high-net-worth individuals (UHNWIs). They commit capital to funds but have limited liability and no control over investment decisions.

Considerations for LPs:

• Return Expectations: Seeking stable, risk-adjusted performance.
• Liquidity & Lock-Up Terms: Hedge funds offer periodic redemption, while private equity funds have longer lock-ups.
• Tax Efficiency: LPs often invest through offshore entities (e.g., Cayman SPCs) for optimal taxation.

General Partners (GPs) – Fund Managers

GPs manage the fund, execute investment strategies, and oversee risk management. Their compensation is performance-based, ensuring alignment with investor interests.

GP Responsibilities:

• Investment Strategy Execution: Deploying capital across asset classes with hedging mechanisms.
• Regulatory Compliance: Ensuring transparency, governance, and reporting standards.
• Investor Relations & Fundraising: Managing LP expectations and securing capital inflows.

3. Strategic Fund Allocation: Combining Discretionary Strategies, Risk-Adjusted Portfolios, and Governance for Maximum Efficiency

Fund Allocation Models:

1. Discretionary Strategies: Human-driven investment decisions based on macroeconomic trends and market events.
2. Systematic Strategies: Algorithmic and quantitative models to execute trades at scale.
3. Risk-Adjusted Portfolio Construction: Diversification across asset classes, controlling volatility, and managing drawdowns.
4. Liquidity Management: Balancing fund redemption cycles with long-term asset allocation.

Governance & Compliance Considerations:

• Independent third-party audits
• Regulatory reporting (AIFMD, FATCA, CRS compliance)
• Transparency in performance fees

4. Taxation Considerations in the UK, Singapore, Thailand, and Australia

United Kingdom (UK)

• Corporate Tax: 25% (2023) on company profits, but trading firms may be eligible for tax deductions on trading expenses.
• Capital Gains Tax: Individuals pay up to 24% on financial investments.
• Fund Structures: UK-based hedge funds often use Limited Partnerships (LPs) or UK Investment Trusts. Offshore funds in the Cayman Islands or Ireland provide tax efficiency.
• Stamp Duty on Equities: 0.5% on stock purchases, exempt for certain fund structures.

Tax Considerations for Investors:

• LPs investing in UK hedge funds are subject to tax withholding based on domicile and tax treaties.
• Non-resident investors may benefit from UK double taxation agreements (DTAs).

Singapore

• Corporate Tax: 17%, with exemptions available for trading and fund management entities.
• Tax Exemptions: The Onshore Fund Tax Exemption (Section 13X) and Offshore Fund Tax Exemption (Section 13R) schemes provide tax neutrality for fund vehicles.
• No Capital Gains Tax: Investors benefit from tax-free capital appreciation.
• GST Exemption: Financial services, including trading and fund management, are exempt from GST.

Tax Considerations for Investors:

• Singapore attracts LPs through tax-exempt fund structures such as Variable Capital Companies (VCCs).
• Family offices managing assets under the S13X incentive are fully tax-exempt.

Thailand

• Corporate Tax: 20%, with potential reductions for financial service companies operating in the Eastern Economic Corridor (EEC).
• Capital Gains Tax: Typically, exempt for foreign investors but applies to local entities. [Yes in certain extend]
• Withholding Tax: 10% on dividends and interest income.
• Securities Transaction Tax: 0.1% on stock transactions for Thai-based traders.

Fund Structures & Exemptions:

• Thailand offers tax-exempt Private Equity Trusts (PETs) for regulated investment funds.
• Foreign investors can use Thailand’s tax treaties to mitigate withholding taxes.

Australia

• Corporate Tax: 30% for large businesses, 25% for small and medium enterprises (SMEs).
• Capital Gains Tax (CGT): 50% exemption for long-term individual investors; corporate investors pay full tax on gains.
• Managed Investment Trusts (MITs): Provide tax-efficient structures for LPs investing in hedge funds.
• Franking Credits: Domestic investors receive tax credits for dividends paid by Australian firms.

Tax Considerations for Investors:

• Non-resident investors are subject to 15% withholding tax unless covered by tax treaties.
• Australia’s Foreign Investment Review Board (FIRB) reviews foreign fund investments in domestic assets.

Conclusion

Proprietary trading firms and fund managers play distinct but complementary roles in capital markets. LPs and GPs create a structured investment ecosystem that balances risk, return, and liquidity. Taxation frameworks in key jurisdictions like the UK, Singapore, Thailand, and Australia significantly impact fund structuring and investor returns. By leveraging efficient tax strategies and regulatory incentives, investors and fund managers can optimise capital allocation and long-term profitability.

I manage a community and platform that connects investors and professional traders, currently based in Singapore and expanding into the United Kingdom. If you're seeking experienced investors or skilled traders with a proven track record, feel free to reach out. Let’s explore how we can collaborate and connect you with the right partners to elevate your strategies and discussions to the next level.

Disclaimer: The content provided in this article is for informational and educational purposes only and does not constitute financial, investment, or legal advice. The views expressed are based on research and analysis and are not tailored to the specific needs or circumstances of any individual or entity.

This article is intended exclusively for Institutional and Accredited Investors who have the knowledge and experience to evaluate investment opportunities and risks. Readers are encouraged to consult with their financial advisors, tax professionals, or legal counsel before making any investment decisions.

The author and publisher are not responsible for any actions taken based on the information provided in this article. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal.

Sean Tan

Senior Manager of Phillip Nova Pte Ltd

Founder & Director of Bespoke 81 | Business Lifestyle