Who Does What in the World of Finance: Banks, VCs, PE Firms, Hedge Funds and HFTs Explained

As of November 14, 2026. Figures come from company filings, industry reports and news reporting available on that date, and some of them will change.

Banks, investment banks, venture capital, private equity, hedge funds and high-frequency trading firms all get described the same way: "they work in finance." People use the names interchangeably, and the news rarely explains the difference. But these are very different businesses. They use different money, hold it for very different lengths of time, get paid in different ways, answer to different people, and hire different kinds of people.

This post explains all seven, in plain language. The single most useful question to keep in mind is this:

Whose money is it, and for how long?

A bank uses your deposits, which you can take back any day. A venture capital fund uses money that investors have locked away for ten years. A high-frequency trading firm uses only its own money and might hold a position for less than a second. Once you know the answer to that question for each kind of firm, most of their other differences follow from it.

The post is long, so here is the order:

A few words you need first
One company, seven kinds of firms (the story that ties everything together)
Commercial banks
Investment banks
Venture capital
Private equity
Hedge funds, single-strategy
Hedge funds, multi-strategy
High-frequency trading firms and market makers
Who hires whom
How each one fails
The comparison table
Glossary

Every technical term is explained the first time it appears. If you forget one, the glossary at the end has all of them.

A Few Words You Need First

Some terms come up in almost every section, so it is worth learning them once.

Equity means ownership. If you own equity in a company, you own a piece of it, usually in the form of shares. If the company does well, your piece becomes more valuable. If it fails, your piece can become worthless.

Debt means a loan. If you lend money to a company, it has to pay you back with interest (a fee for borrowing), whether it does well or badly. Debt holders get paid before equity holders if things go wrong, which makes debt safer but means its upside is capped.

Leverage means using borrowed money to make a bigger bet than your own money allows. If you buy a $100 asset with $20 of your own money and $80 of borrowed money, a 10% rise in the asset's value makes you a 50% return on your $20. A 10% fall loses you half of it. Leverage multiplies gains and losses in both directions, and it shows up in almost every failure story later in this post.

A fund is a pool of money collected from many investors and managed by professionals who decide what to buy.

Limited partners (LPs) are the investors who put money into a fund. They are usually large institutions: pension funds that pay retirement income, university endowments, insurance companies, sovereign wealth funds (investment funds owned by governments) and very wealthy families. They are called "limited" because they do not make investment decisions and can only lose the money they put in.

The general partner (GP) is the firm that runs the fund. It decides what to buy and sell, and it usually invests some of its own money alongside the LPs so that it has something to lose too. The GP's commitment is typically a small slice of the fund, often a few percent. The contract that sets out the rules between LPs and the GP is called the limited partnership agreement (LPA).

Assets under management (AUM) is the total amount of money a firm manages for its investors. It is the most common way to measure the size of an investment firm.

Management fee is a yearly fee the GP charges just for managing the money, usually a percentage of the fund's size. The traditional figure is around 2%.

Carried interest, or carry, is the GP's share of the profits, traditionally around 20%. It is the main way investment managers get rich, and it only pays out if the fund actually makes money. The combination is often called "2 and 20."

Hurdle rate, or preferred return, is the minimum return LPs must receive before the GP can take any carry. A common figure is 8% per year.

Liquidity means how quickly something can be turned into cash without losing value. Cash in a bank account is very liquid. A stake in a private company is very illiquid, because you cannot sell it until someone wants to buy it, which might take years.

Lockup is a period during which investors are not allowed to take their money out of a fund, or can only take it out slowly.

How an LP and GP actually work together

Private equity and venture capital funds share the same basic skeleton. A typical fund has a fixed life of about ten years, often with one or two optional extensions. When an LP commits money, it does not hand it all over on day one. Instead, the GP sends capital calls over the first several years, asking for portions of the commitment whenever it finds something to invest in.

When the fund sells an investment, the money flows back in a fixed order called the waterfall. LPs first get back the money they put in. Then they get their preferred return, commonly 8%. Only after that does the GP start taking its 20% carry. Many agreements also include a clawback: if the GP takes carry early on a lucky win and later investments lose money, the GP has to give some of that carry back.

If you want to see real numbers, CalPERS, the large California public pension fund, published a document walking through what happens to a $120 million commitment to a ten-year fund under these terms. It is linked in the references.

Hedge funds use a similar LP and GP structure, with one big difference that we will get to: there is no fixed ten-year life. Investors can eventually take their money out, although the rules for doing so can still stretch a full exit over several years.

One Company, Seven Kinds of Firms

Before explaining each kind of firm separately, here is how they all show up in the life of a single company. The company is made up, but every step is how things work in practice.

Two engineers start a robotics company called Fernhill. They have a prototype and no revenue.

Venture capital. They raise $3 million from a venture capital firm in exchange for 20% of the company. This first round is called the seed round. Over the next six years, as the company grows, they raise larger rounds called Series A, B and C, each time selling more of the company to VC firms at a higher price.

Commercial bank. Fernhill opens bank accounts to hold its cash and pay salaries. Once it has steady revenue, a bank gives it a credit line, a pre-approved loan it can draw on when it needs cash to buy parts before customers pay.

Investment bank. After eight years, Fernhill is large and profitable, and its early investors want to cash out. It decides to sell shares to the public for the first time, which is called an initial public offering (IPO). It hires investment banks to set the price, find buyers among large investors, and guarantee the sale. The banks take a fee out of the money raised.

High-frequency trading firms. Once Fernhill's shares trade on a stock exchange, anyone can buy or sell them. When an ordinary person clicks "buy" in a brokerage app, the other side of that trade is very often an electronic market maker, a firm that stands ready to buy or sell at any moment and earns a tiny amount on each trade.

Hedge funds. Some hedge funds buy Fernhill's shares because they think the price will rise. One fund thinks the company is overvalued and bets against it. Another, an activist, buys a stake and publicly pushes the board to change strategy. At a large multi-strategy fund, one small team trades the stock around its quarterly earnings announcements.

Private equity. Ten years later, Fernhill's growth has slowed and its share price has fallen. A private equity firm offers to buy the entire company from its public shareholders, taking it private. It pays partly with its fund's money and partly with borrowed money, which investment banks help arrange. It plans to improve the business for five years and then sell it.

Every institution in this post touched the same company, at different stages, with different money, for different reasons. Now let us go through each one properly.

Commercial Banks

What they do: Commercial banks take in deposits from people and businesses, keep that money safe, and lend most of it out to other people and businesses at a higher interest rate than they pay depositors.

Whose money: Depositors'. When you put money in a bank, you are effectively lending it to the bank.

How long: This is the strange part. Depositors can usually take their money back any day, but the bank has lent much of it out for years, in the form of mortgages and business loans. Banks borrow short and lend long. This works because on any given day only a small fraction of depositors want their money back. It stops working when everyone wants their money back at once, which is called a bank run. We will see one in the failures section.

Services:

Checking and savings accounts
Mortgages, auto loans and personal loans
Business loans and credit lines
Credit cards
Payments and money transfers, domestic and international
Cash management for companies (helping them move and organize money across accounts)
Trade finance, such as letters of credit, where the bank guarantees an importer will pay an exporter
Foreign exchange (converting currencies) for clients
Custody (holding securities safely on behalf of investors), at larger banks
Wealth management for richer clients, at larger banks

How they make money: Mainly through net interest income, which is the interest a bank earns on loans and investments minus the interest it pays depositors. The difference expressed as a percentage is called the net interest margin. Banks also earn fees on cards, payments, accounts and advice.

The largest US bank shows how central lending still is. In 2025, JPMorgan Chase reported total net revenue of $182.4 billion, of which $95.4 billion was net interest income. More than half of the biggest bank's revenue came from the gap between what it earned and what it paid. It ended 2025 with about $4.4 trillion in total assets, about $2.6 trillion in deposits, and $57.0 billion in net income.

Governance: Large banks are usually public companies, owned by shareholders and overseen by a board of directors. But they are also the most heavily regulated businesses in this post, because their failure can hurt ordinary people and the whole economy. Regulators set capital requirements, which force banks to fund part of their lending with their own money rather than only deposits, so they can absorb losses. They also set liquidity rules, run stress tests, and supervise banks directly.

Many countries also have deposit insurance, a government-backed guarantee that small depositors get their money back if a bank fails. In the US, the Federal Deposit Insurance Corporation (FDIC) covers $250,000 per depositor, per insured bank, per ownership category. The point of deposit insurance is to stop bank runs before they start: if your money is guaranteed, you have no reason to rush to withdraw it.

A short history note. In the US, commercial banking and investment banking used to be legally separate. The Banking Act of 1933, usually called Glass-Steagall, separated the two and also created the FDIC. In 1999, the Gramm-Leach-Bliley Act repealed the provisions that restricted affiliations between banks and securities firms. That is why today a single company like JPMorgan can run both a consumer bank and a large investment bank. They are still very different businesses, just under one roof.

Who they hire: Credit analysts who decide whether borrowers can repay, relationship managers who look after business clients, branch and operations staff, risk managers, compliance officers, and increasingly, software engineers.

Examples: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, HSBC, BNP Paribas.

Investment Banks

What they do: Investment banks help companies, governments and investors raise money, buy or sell businesses, and trade securities. They mostly earn fees for advice and for arranging deals, rather than lending out deposits.

Whose money: Mostly their clients'. When an investment bank runs an IPO, the money comes from investors buying the shares, not from the bank. Banks do use their own balance sheet in trading and in some lending.

How long: Short. An advisory deal might take months. A trading position might last hours or days.

Services:

Mergers and acquisitions (M&A) advisory. Advising a company that wants to buy another company (buy-side) or sell itself or a division (sell-side): valuing the business, finding buyers or targets, and negotiating terms.
Equity capital markets (ECM). Helping companies sell shares, including IPOs, follow-on offerings (selling more shares after an IPO) and convertible bonds (debt that can turn into shares).
Debt capital markets (DCM). Helping companies and governments issue bonds, which are loans broken into tradeable pieces and sold to many investors.
Underwriting. For both shares and bonds, the bank often buys the securities from the issuer and resells them to investors, taking on the risk that they will not sell at the expected price. The fee for this is called the underwriting spread or gross spread.
Leveraged finance. Arranging the loans and high-yield bonds (bonds issued by riskier borrowers, which pay higher interest) that fund private equity buyouts.
Restructuring. Advising companies in financial trouble on how to renegotiate their debts or go through bankruptcy.
Sales and trading. Buying and selling stocks, bonds, currencies and commodities for large clients like pension funds and hedge funds. The bond, currency and commodity side is often called FICC (fixed income, currencies and commodities).
Prime brokerage. Providing hedge funds with loans, the ability to borrow shares, and trade settlement. This turns out to matter a lot in the failures section.
Equity research. Analysts who study companies and publish views on whether their shares are good investments.

Smaller firms called boutiques, such as Lazard and Evercore, focus mostly on advisory and skip the businesses that need a large balance sheet. The largest full-service banks are sometimes called bulge bracket banks.

How they make money: Advisory fees, underwriting spreads, and trading revenue.

The IPO fee is one of the most interesting numbers in finance because it barely changes. Research by Professor Jay Ritter showed that gross spreads on moderate-size US IPOs cluster at exactly 7%. An SEC commissioner's staff, working with Ritter, later found that from 2001 through 2016, more than 96% of midsized US IPOs had a spread of exactly 7%. Very large IPOs pay less, because those companies have the bargaining power to negotiate it down.

Goldman Sachs shows how the pieces fit together. In 2025 it reported net revenues of $58.28 billion. Its investment banking fees were $9.34 billion, split into advisory ($4.73 billion), equity underwriting ($1.78 billion) and debt underwriting ($2.83 billion). But its trading businesses were larger: equities brought in $16.54 billion and FICC $14.52 billion. So while "investment bank" sounds like a deal-making business, at the biggest firms trading often earns more than the deals do.

Investment banks are ranked in league tables, which list banks by the value of deals they worked on or the fees they earned. In 2025, according to LSEG data reported by Reuters, Goldman ranked first in M&A, advising on $1.48 trillion of deals, while JPMorgan earned the most in total investment banking fees once equity and debt underwriting were included. Different data providers measure fees slightly differently, so their figures do not always match each other or the banks' own reports.

Governance: The large investment banks sit inside public companies, so they have shareholders and boards. They are regulated as securities firms, and those inside banking groups are also covered by bank regulation. Because the same firm may advise a company on a secret deal and also trade that company's shares, banks must keep information barriers between departments so that confidential deal information does not reach traders.

Who they hire: Graduates join as analysts and spend long hours building financial models and pitch documents. They move up to associate, vice president, director and managing director (MD), who brings in clients. Trading and sales hire separately, as do research and risk.

Examples: Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Citigroup, Barclays, Lazard, Evercore.

Venture Capital

What they do: Venture capital (VC) firms invest in young, fast-growing private companies in exchange for a minority stake, hoping a few of them grow into very large companies.

Whose money: LPs', pooled in a fund the VC firm manages as the GP.

How long: About ten years, the life of the fund. A single investment can take a decade to pay off, because the only ways to get money back are an exit: the company is bought by another company, or it goes public through an IPO.

Services:

Equity investment at different stages: seed (the first institutional money, often before revenue), then Series A, B, C and later rounds as the company grows. Late-stage investing in large private companies is sometimes called growth investing.
Board seats. Lead investors usually join the company's board of directors.
Follow-on investment. Putting more money into the best companies in later rounds. Funds keep reserves for this.
Hiring help, especially for senior roles.
Introductions to customers, partners and later-stage investors.
Platform teams at larger firms that help portfolio companies with recruiting, marketing and operations.

A related model is the accelerator, such as Y Combinator, which invests small amounts in many very early companies at once and runs them through a structured program.

How they make money: Management fees and carry, under the LP and GP structure described earlier. Carry only appears when portfolio companies are sold or go public at a higher value than the fund paid.

Two terms matter here. A company's valuation is what investors agree it is worth in a funding round. Dilution is what happens to existing owners when the company sells new shares: their percentage ownership shrinks, even though the company may be worth more.

The power law: the most important idea in VC. Venture returns are extremely uneven. Most investments lose money, and a tiny number of huge winners make up for everything else. Data from Correlation Ventures, which tracks most US venture financings since the early 1990s, found that almost two thirds of financings lost money for investors over the period it studied, and nearly half did over a more recent decade. Correlation also found that, across each decade, only about 17% to 23% of invested capital generated 90% of the industry's profits.

This explains how VCs behave. A fund does not succeed by avoiding losses. It succeeds by holding the one company that returns the whole fund. That is why VCs will back an idea that looks unlikely to work, as long as it could become enormous if it does.

Market size: According to Crunchbase, investors put about $425 billion into more than 24,000 private companies worldwide in 2025, around 30% more than in 2024. Crunchbase later revised the 2025 total upward to about $440 billion as late deals came in. About half of 2025's funding went to AI companies, roughly $211 billion. The money was also unusually concentrated: five companies (OpenAI, Scale AI, Anthropic, Project Prometheus and xAI) raised $84 billion between them, about 20% of all venture funding that year.

Governance: At the fund level, the LPA governs the relationship between LPs and the GP. At the company level, VCs usually own a minority, so they cannot simply order founders around. Instead, they rely on board seats and protective provisions written into the investment terms, which give them a veto over major decisions like selling the company or raising more money on worse terms.

Who they hire: Former founders, former operators (people who ran product, engineering or sales at startups), and some people from investment banking or consulting. The job is mostly finding companies, judging founders, and helping after investing. Junior roles are few and competitive.

Examples: Sequoia Capital, Andreessen Horowitz, Accel, Benchmark, Founders Fund, Y Combinator.

Private Equity

What they do: Private equity (PE) firms raise money from large investors, buy controlling stakes in established companies, often with borrowed money, work to improve them, and sell them for a profit.

A controlling stake means owning enough of a company to choose its board of directors, and through the board, its CEO. That is the biggest difference from venture capital. A VC owns a minority and has to persuade founders. A PE firm owns the company and can direct it.

Established means the company already has steady revenue and usually profits. PE firms are not betting on whether a product will work. They are betting they can run a working business better.

Whose money: LPs', through a fund, plus a large amount of borrowed money.

How long: Funds last about ten years. Individual companies are usually held for several years before being sold.

The borrowed money part. A purchase funded largely with debt is called a leveraged buyout (LBO). The PE firm puts in part of the purchase price from its fund, and banks or other lenders provide the rest as debt. The key detail most people miss is that the debt goes onto the company being bought, not onto the PE firm. The company has to pay the interest out of its own cash. If the business does well, the PE firm's smaller equity slice grows a lot in value, which is leverage working as intended. If the business struggles, the interest payments can sink it. We will see exactly that with Toys "R" Us.

Services:

Leveraged buyouts of private or public companies.
Take-privates, buying a publicly listed company from all its shareholders so it stops trading on a stock exchange.
Growth equity, minority investments in more mature, fast-growing companies, close to late-stage VC.
Carve-outs, buying a division that a large company wants to sell.
Buy-and-build, buying one platform company and then merging smaller add-on acquisitions into it.
Operational improvement, changing management, cutting costs, raising prices or expanding into new markets.
Secondaries, buying existing fund stakes from LPs who want to sell early, or buying companies from other PE funds.

The largest PE firms have grown into general alternative investment managers. Blackstone, the largest, reported nearly $1.4 trillion in assets under management as of September 30, 2026, spread across real estate, private equity, infrastructure, life sciences, growth equity, credit, real assets, secondaries and hedge funds.

How they make money: Management fees and carry, plus, at some firms, fees charged to the companies they own for advice and services.

Market size: According to Bain & Company's 2026 Global Private Equity Report, global buyout deal value rose 44% in 2025 to $904 billion. The $56.6 billion take-private of Electronic Arts set a new all-time record for a buyout. On the selling side, buyout-backed exit value rose 47% to $717 billion. Bain also noted that the industry was sitting on about $1.3 trillion of dry powder, money that LPs have committed but that has not yet been invested.

Governance: The same LP and GP structure as VC, but at the company level the PE firm controls the board. That control is the whole model: it is how a PE firm can replace a CEO or change strategy without persuading anyone. The large PE firms themselves (Blackstone, KKR, Apollo, Carlyle) are publicly listed companies with their own shareholders.

Who they hire: Mostly former investment banking analysts and associates, because the core skill is financial modeling and deal execution. Larger firms also hire operating partners, experienced executives who help run portfolio companies.

Examples: Blackstone, KKR, Apollo, Carlyle, EQT, Thoma Bravo.

Hedge Funds, Single-Strategy

What they do: Hedge funds invest pooled money in publicly traded markets (stocks, bonds, currencies, commodities and derivatives, which are contracts whose value depends on something else, like a stock price) using a specific strategy, often including bets that prices will fall.

The name is historical. The early hedge funds "hedged" their bets by owning some stocks and betting against others, so a falling market would hurt them less. Today "hedge fund" describes a legal structure and fee model more than any single strategy. Plenty of hedge funds do not hedge much at all.

Whose money: LPs', usually wealthy individuals and institutions.

How long: More flexible than PE or VC, but less flexible than it sounds. Hedge funds are usually open-ended: unlike a PE or VC fund, there is no fixed end date, and investors can add money and take it out over time. Taking money out is called a redemption. But redemptions follow rules written into the fund's documents, and those rules can be strict:

Lockup. New money often cannot be withdrawn at all for an initial period, often a year, and sometimes longer.
Notice period. Investors must announce a withdrawal well in advance.
Redemption dates. Withdrawals are only allowed on set dates, such as the end of each quarter.
Gate. The fund can cap how much money leaves in any one period, for example a small percentage of an investor's capital each quarter, so a full exit can take years.
Suspension. In a crisis, fund documents usually allow the manager to halt withdrawals entirely.

How strict the terms are depends on the fund. The most in-demand funds can impose the toughest terms, because investors want in badly enough to accept them. Citadel began requiring terms that significantly restricted withdrawals back in 1998, and during the 2008 financial crisis it suspended redemptions altogether. Smaller or newer funds usually have to offer easier terms to attract money.

Even so, because investors can eventually leave, hedge funds mostly invest in things they can sell relatively quickly, such as public stocks and bonds, rather than private companies.

Two terms are essential here. Being long means owning something because you expect it to rise in value. Being short means betting it will fall. The usual way to short a stock is short selling: you borrow shares from someone, sell them, and hope to buy them back later at a lower price before returning them. If the price rises instead, your losses have no ceiling, because there is no limit to how high a price can go.

Common strategies:

Long/short equity. Owning stocks expected to rise and shorting stocks expected to fall.
Global macro. Betting on big economic trends through interest rates, currencies, bonds and commodities.
Event-driven. Trading around specific corporate events. Merger arbitrage bets on whether announced acquisitions will complete. Distressed investing buys the debt of companies in or near bankruptcy.
Activist. Buying a significant stake in a public company and publicly pushing its board for changes, such as new management, asset sales or a different strategy.
Credit. Investing in corporate bonds and loans.
Quantitative (quant) or systematic. Using mathematical models and computers to find patterns and make trades, with little or no human judgment on individual trades.
Relative value. Betting on the price gap between two related securities rather than on whether either one rises or falls. Arbitrage means profiting from price differences between related things, ideally with little risk.

How they make money: The traditional model is 2 and 20: a management fee of about 2% of assets and a performance fee of about 20% of profits. Many funds use a high-water mark, which means they cannot charge a performance fee again until they have recovered any earlier losses.

Industry size: According to HFR, global hedge fund industry capital ended September 2026 at $5.64 trillion, the industry's sixteenth consecutive quarterly increase.

Governance: The LP and GP structure, with the fund's offering documents setting redemption terms and fees. In the US, larger managers register with the SEC as investment advisers and file regular reports. Hedge funds are lightly regulated compared with banks because they take money only from wealthy and institutional investors, who are assumed to understand the risks.

Who they hire: Investment analysts who research companies or markets, portfolio managers who make the final decisions, traders, and at quant funds, researchers with backgrounds in mathematics, physics, statistics and computer science.

Examples by strategy: Bridgewater Associates (macro), Renaissance Technologies (quant), Pershing Square (concentrated activist), Elliott Management (activist and distressed).

Hedge Funds, Multi-Strategy

What they do: Multi-strategy hedge funds run dozens or hundreds of separate small investment teams under one roof, each with its own slice of money and strict loss limits, and combine them into one fund.

These firms are often called pod shops, and each team is a pod. A pod is usually led by a portfolio manager (PM) with a few analysts, and it runs its own strategy independently. A central team decides how much money each pod gets and monitors the combined risk across all of them, so that no single bet can sink the whole fund.

Whose money: LPs', mostly large institutions.

How long: Open-ended like other hedge funds, but the largest platforms lock money up for years. Millennium's investors can withdraw only 5% of their capital each quarter, which means a full exit can take up to five years. Citadel has been reported to run about 30% of its investor capital on a rolling two-year lockup, with the rest able to leave in small quarterly slices.

The reason is structural. A pod shop runs hundreds of positions financed with borrowed money. If investors could all leave at once, the fund would be forced to sell everything at the worst possible moment, which is exactly what happened to many funds when LTCM collapsed. Long redemption terms give the platform time to ride out bad markets instead of selling into them.

How the pod model works: The key idea is that a firm does not need any single brilliant manager. It needs many decent ones whose results do not move together, plus fast removal of anyone who starts losing. Risk limits are strict. A drawdown is a fall from a previous peak value, and pods that hit their drawdown limit get cut. At Millennium, a drawdown of roughly 5% has been reported to halve a pod's capital, and roughly 7.5% to shut the pod down. This is called a stop-out.

The model has become very popular. According to HFR, multi-strategy funds reached a record $900 billion in assets in the third quarter of 2026.

How they make money: pass-through fees. This is the biggest difference from single-strategy funds. Instead of charging a fixed management fee, many pod shops pass their actual operating costs directly to investors, including the large bonuses paid to successful PMs, technology, data and office costs. A performance fee is charged on top.

Cambridge Associates, an investment adviser to large institutions, found that every multi-manager platform it reviewed passed through expenses beyond traditional fees, and that sampled pass-through fees ranged from 0.87% to 12.99% of assets, with a mean of 5.93% and a median of 4.53%. Compare that to a 2% management fee, and you can see why pass-through fees are controversial.

The case in their favor is that the expenses are what produce the returns. An analysis by Barclays, published by MFA (a hedge fund industry association), found that pass-through funds produced higher after-fee returns than peers without pass-through billing over the three years it studied. Investors keep paying because, for the best platforms, they still end up with more money after fees.

Governance: Same legal structure as other hedge funds. The distinctive part is internal: a central risk team with real power over every pod.

Who they hire: Experienced PMs who can show a record of profits, analysts, quant researchers, and a large number of risk, technology and data staff. PMs are paid a share of their own pod's profits, which can make individual pay very high and very unstable.

A useful distinction: Citadel and Citadel Securities are different businesses. Citadel is a multi-strategy hedge fund that manages money for outside investors. Citadel Securities is a market maker that trades its own capital. Ken Griffin founded and controls both. If you understand why those are different, you understand the difference between this section and the next.

Examples: Citadel, Millennium Management, Point72, Balyasny.

High-Frequency Trading Firms and Market Makers

What they do: High-frequency trading (HFT) firms and electronic market makers use fast computers to continuously offer to buy and sell securities, earning a tiny amount on a huge number of trades.

Whose money: Their own. There are no outside investors, no management fees and no performance fees. The firm's partners and employees own it, and the profits are theirs. This makes them a different kind of business from everything else in this post, closer to a technology company than to a fund. These firms are often called proprietary trading firms, or prop shops, because they trade for themselves.

How long: Very short. A position may last seconds or less. Most of these firms aim to end each day with little risk left on their books.

How market making works: At any moment, a market maker shows two prices for a stock: the bid, the price at which it will buy, and the ask, the price at which it will sell. The ask is slightly higher than the bid. The gap is called the spread. If a market maker buys from one person at the bid and sells to another at the ask, it keeps the spread.

On a single trade this might be a fraction of a cent per share. But across billions of shares, every day, in thousands of securities on exchanges around the world, it adds up. Market makers provide something useful in return: whenever you want to buy or sell, someone is there to trade with you, at a price very close to the last one. That is what liquidity means in a market.

The risk is that prices move against the firm before it can trade out. Speed is the defense. Latency is the delay between something happening in the market and a firm reacting to it, measured in millionths of a second. Firms pay to place their computers inside or next to exchange data centers, which is called co-location, and build custom hardware to shave off those millionths.

Services and activities:

Market making in stocks, options, bonds, currencies and exchange-traded funds (ETFs), which are funds that trade on an exchange like a single stock.
Options market making, quoting prices on options contracts, which requires constant pricing models.
Designated market maker roles, where an exchange assigns a firm responsibility for keeping trading orderly in particular stocks.
Retail wholesaling. In the US, brokerage apps often send customer orders to large market makers called wholesalers, who fill them, sometimes paying the broker for the order flow.
Arbitrage across exchanges and related products, such as an ETF and the stocks inside it.

How they make money: Trading profits, mainly from spreads and small price differences. Because these firms are mostly private, their numbers usually become public through press reports rather than filings.

The scale has become remarkable. Bloomberg reported, citing people familiar with the results, that Jane Street earned a record $39.6 billion of trading revenue in 2025, beating its nearest rival, JPMorgan Chase, by 11% with only about 3,500 employees. Bloomberg also reported that Citadel Securities made a record $12.2 billion of trading revenue in 2025, and Citadel Securities says it handles about 35% of US-listed retail stock volume. In January 2026, Bloomberg reported that Hudson River Trading's 2025 trading revenue was on track for a record of about $12.3 billion.

Governance: Privately owned partnerships, regulated as broker-dealers and bound by exchange rules. Regulators require them to have controls that stop erroneous orders from reaching the market, a rule that exists partly because of the Knight Capital failure described later.

Who they hire: Quantitative researchers (often with mathematics, physics or computer science backgrounds, including many former competitive programmers and olympiad participants), traders, and software engineers who write very fast code, often in C++, or design custom chips called FPGAs (field-programmable gate arrays) for the lowest possible latency. These firms are known for puzzle-heavy interviews and very high pay.

Examples: Jane Street, Citadel Securities, Hudson River Trading, Jump Trading, Optiver, Tower Research Capital, Virtu Financial (one of the few that is publicly listed).

Who Hires Whom

People move between these industries in fairly predictable paths. The skills each one values shape where people come from and where they go next.

Domain	Main hires	Core skill	Common next move
Commercial banks	Credit analysts, relationship managers, risk and compliance staff	Judging whether borrowers can repay	Senior roles within banking
Investment banks	Graduate analysts and associates	Financial modeling, deal execution, long hours	Private equity, hedge funds, corporate development roles
Venture capital	Former founders, operators, some bankers and consultants	Judging founders and markets	Partner at a VC firm, starting a company
Private equity	Former investment banking analysts and associates	Modeling, deal structuring, operations	Senior PE roles, executive roles at portfolio companies
Single-strategy hedge funds	Investment analysts, portfolio managers, quants	Research and judgment, or models	Starting their own fund
Multi-strategy hedge funds	Portfolio managers with a track record, analysts, quant researchers	Steady profits within strict loss limits	Moving between pod shops, starting a fund
HFT and market makers	Quant researchers, traders, low-latency engineers	Mathematics, probability, fast code	Other trading firms, starting a trading firm

The most famous pipeline is investment banking to private equity. Banks train analysts in exactly the modeling and deal skills PE firms need, so PE firms recruit heavily from bank analyst classes. The newest pipeline runs from mathematics and computer science straight into trading firms, often skipping traditional finance entirely.

How Each One Fails

Each kind of firm has a characteristic way of failing, and it comes directly from its structure. Studying failures is one of the best ways to understand what each business really depends on.

Bank: Silicon Valley Bank (2023)

A bank depends on depositors not all leaving at once. Silicon Valley Bank's depositors were heavily concentrated among technology startups and their investors, and most of its deposits were above the insured limit, which meant depositors had a strong reason to run at the first sign of trouble. The bank had also invested much of its deposits in long-term bonds that lost value when interest rates rose.

On March 8, 2023, SVB announced a $1.8 billion loss from selling securities and plans to raise more capital. Depositors read this as a sign of distress. The Federal Reserve later testified that on March 9 depositors pulled more than $40 billion out of the bank, at an extraordinary rate. AP reported the figure as $42 billion, about 20% of the bank's assets, in a single day. Regulators closed the bank the next day. It was a textbook bank run, sped up by phones and social media.

Lesson: banks borrow short and lend long, and confidence is the only thing holding that together.

Hedge fund: Long-Term Capital Management (1998)

LTCM was founded by star bond traders and had two Nobel Prize-winning economists on its board. Its strategy was to find tiny price gaps between related securities and use enormous leverage to make those tiny gaps pay off. When Russia defaulted on its debt in 1998 and markets panicked, the gaps widened instead of closing, and leverage turned small losses into enormous ones.

Because LTCM owed money to so many large banks, its collapse threatened them too. In September 1998, the Federal Reserve Bank of New York brought together 14 banks and brokerage firms, which invested $3.6 billion in LTCM to allow an orderly wind-down instead of a fire sale. The Fed organized the rescue but did not lend its own money. The fund's original partners and investors were left with 10% of it.

Lesson: leverage turns a small mistake into a fatal one, and a leveraged fund's problems quickly become its lenders' problems.

Hidden leverage through the banks: Archegos (2021)

Archegos Capital Management was technically a family office, a firm that invests one family's wealth rather than outside investors' money, but it traded like an aggressive hedge fund. It built enormous positions in a handful of stocks using total return swaps, contracts in which a bank holds the shares and passes the gains and losses to the client. Because the positions were spread across several banks through swaps, no single bank could see how large the total bet was.

When some of those stocks fell in March 2021, Archegos could not meet its margin calls, demands from lenders for more money to cover losses. The banks raced to sell. Credit Suisse lost about $5.5 billion and had to raise $1.9 billion in new capital. Combined losses across the banks involved were around $10 billion.

Lesson: this is why prime brokerage, the investment bank service that lends to hedge funds, is risky. The fund's leverage is the bank's exposure.

Private equity: Toys "R" Us (2005 to 2018)

In 2005, Bain Capital, KKR and Vornado Realty Trust bought Toys "R" Us in a $6.6 billion leveraged buyout. The debt went onto the company, and by 2017 Toys "R" Us was paying about $400 million a year in interest. That money could not be spent on stores, websites or prices, at the exact moment Amazon and online shopping were changing how people bought toys. In September 2017 the company filed for bankruptcy with about $5.2 billion of debt, and in 2018 it closed its remaining US stores.

It would be unfair to blame debt alone. Online competition hit many retailers, including ones without buyout debt. But the debt removed the company's room to respond.

Lesson: an LBO works when the company's cash comfortably covers the interest. When the business weakens, leverage leaves no margin for error.

Venture capital: failure built into the model

VC has no single famous collapse, because failure is part of how it works. As the power law data shows, most venture investments lose money, and that is expected. A VC fund fails when it does not hold any of the rare enormous winners. Its losses are quiet: startups shut down one by one, and LPs simply get back less than they put in, years later.

Lesson: in VC, the risk is not losing on most companies. It is missing the few that matter.

HFT: Knight Capital (2012)

Knight Capital was a major electronic market maker in US stocks, handling orders sent by large retail brokers. On August 1, 2012, it deployed new code incorrectly to its order-routing system, which accidentally reactivated an old, defective function. According to the SEC's order, in the first 45 minutes of trading the system sent more than 4 million orders into the market while trying to fill just 212 small customer orders, building billions of dollars of unwanted positions. Knight lost more than $460 million. An internal system had even sent 97 automated emails flagging an error before the market opened, but they were not designed as alerts and nobody acted on them. Knight's share price lost about three quarters of its value within two days, and the SEC later fined the firm $12 million under a rule requiring controls on market access.

Lesson: when you trade at machine speed, a software bug becomes a financial disaster in minutes. For HFT firms, engineering discipline is risk management.

The Comparison Table

	Commercial banks	Investment banks	Venture capital	Private equity	Single-strategy hedge funds	Multi-strategy hedge funds	HFT and market makers
One line	Take deposits, make loans	Advise on deals, raise capital, trade for clients	Minority stakes in young companies	Control of established companies	One investing strategy in public markets	Many small teams under central risk control	Constantly quote buy and sell prices
Whose money	Depositors'	Mostly clients'	LPs'	LPs' plus borrowed money	LPs'	LPs'	Their own
How long	Deposits can leave any day, loans last years	Months for deals, hours to days for trades	About 10 years	About 10-year funds, several years per company	Months to years; withdrawals limited by lockups, notice periods and gates	Positions often short; investor money often locked for years	Seconds or less
Main revenue	Net interest income, fees	Advisory fees, underwriting spreads, trading	Management fee, carry	Management fee, carry	Management and performance fees	Pass-through expenses plus performance fee	Trading profits from spreads
Who controls it	Public shareholders, board, heavy regulation	Public shareholders, board, securities and bank regulators	GP, under the LPA	GP, under the LPA	GP, under fund documents	GP, with a central risk team	Owner-partners, broker-dealer rules
Relationship to companies	Lender	Adviser and intermediary	Minority owner with a board seat	Controlling owner	Public shareholder, sometimes activist	Public shareholder, short term	Intermediary in their shares
Typical failure	Bank run	Losses from lending to risky clients	Missing the rare winners	Too much debt on a weakening company	Leverage on a wrong bet	Crowded trades across pods	Technology errors
Examples	JPMorgan Chase, HSBC	Goldman Sachs, Morgan Stanley, Lazard	Sequoia, Andreessen Horowitz	Blackstone, KKR	Bridgewater, Renaissance	Citadel, Millennium	Jane Street, Citadel Securities

Glossary

Activist investor: An investor who buys a significant stake in a public company and pushes its board for changes.

Arbitrage: Profiting from a price difference between related securities, ideally with little risk.

Ask: The price at which a market maker is willing to sell.

Assets under management (AUM): The total money a firm manages for investors.

Bank run: Many depositors withdrawing their money from a bank at once, out of fear it will fail.

Bid: The price at which a market maker is willing to buy.

Bond: A loan split into tradeable pieces and sold to many investors.

Capital call: A request from a GP for LPs to send part of the money they committed.

Capital requirements: Rules forcing banks to fund part of their assets with their own money so they can absorb losses.

Carried interest (carry): The GP's share of a fund's profits, traditionally about 20%.

Carve-out: Buying a division that a larger company is selling.

Clawback: A rule requiring a GP to return carry if later losses mean it was overpaid.

Co-location: Placing trading computers inside or next to an exchange's data center to reduce delay.

Controlling stake: Enough ownership to choose a company's board, and through it, its management.

Debt: Borrowed money that must be repaid with interest.

Deposit insurance: A government-backed guarantee that small depositors get their money back if a bank fails.

Derivative: A contract whose value depends on something else, such as a stock price or an interest rate.

Dilution: The shrinking of existing owners' percentage when a company issues new shares.

Drawdown: A fall in value from a previous peak.

Dry powder: Money committed to funds but not yet invested.

Equity: Ownership in a company.

Exit: The sale or IPO through which an investor gets its money back from a private company.

Family office: A firm that manages the wealth of one family.

FICC: Fixed income, currencies and commodities, a major area of trading at investment banks.

Fund: A pool of money from many investors, managed by professionals.

Gate: A limit on how much money investors can withdraw from a fund in a single period.

General partner (GP): The firm that runs a fund and makes its investment decisions.

Gross spread: The fee underwriters take from the money raised in an offering.

High-water mark: A rule that a hedge fund cannot charge performance fees again until it recovers earlier losses.

Hurdle rate (preferred return): The minimum return LPs must get before the GP earns carry.

Initial public offering (IPO): A company's first sale of shares to the public.

Latency: The delay between a market event and a trading system's response.

League table: A ranking of banks by deal value or fees.

Leverage: Using borrowed money to make a larger investment than your own money allows.

Leveraged buyout (LBO): Buying a company with a large amount of borrowed money, with the debt placed on the company itself.

Limited partner (LP): An investor in a fund who does not make decisions and can only lose what it put in.

Limited partnership agreement (LPA): The contract that governs a fund.

Liquidity: How easily something can be turned into cash, or in markets, how easily you can trade without moving the price.

Lockup: A period when investors cannot withdraw money from a fund, or can only withdraw it slowly.

Long: Owning something because you expect it to rise in value.

Management fee: A yearly fee for managing a fund, traditionally about 2%.

Margin call: A lender's demand for more money to cover losses on a leveraged position.

Market maker: A firm that continuously offers to buy and sell a security and earns the spread.

Net interest income: Interest a bank earns minus interest it pays.

Notice period: How far in advance an investor must announce a withdrawal from a fund.

Pass-through fees: A model in which a fund charges investors its actual operating costs, including staff pay, instead of a fixed management fee.

Pod: A small, independent investment team inside a multi-strategy fund.

Power law: A pattern in which a tiny share of outcomes accounts for most of the total result.

Prime brokerage: Investment bank services that lend money and shares to hedge funds and settle their trades.

Proprietary trading: Trading a firm's own money rather than clients' money.

Redemption: An investor withdrawing money from a fund.

Seed round / Series A, B, C: Successive funding rounds for a startup, from earliest to later.

Short selling: Borrowing and selling shares to profit if their price falls.

Spread: The gap between the bid and ask prices.

Stop-out: Shutting down or cutting a pod after it hits its loss limit.

Take-private: Buying all of a public company's shares so it stops trading on an exchange.

Total return swap: A contract in which one party (often a bank) holds an asset and passes its gains and losses to another party.

Underwriting: A bank buying securities from an issuer and reselling them to investors, taking the risk they will not sell.

Valuation: What investors agree a company is worth.

Waterfall: The order in which a fund's profits are paid out to LPs and the GP.

Wholesaler: A large market maker that fills orders sent by retail brokerages.

Disclaimer

This post is for informational and educational purposes only. It is not legal, financial, tax, or investment advice, and nothing in it is a recommendation to invest in, work for, or do business with any firm mentioned.

Figures are based on company filings, industry reports, and news reporting available as of November 14, 2026, all listed in the references below. Some figures, particularly for privately held trading firms, come from press reports citing unnamed sources rather than official disclosures, and are described as reported. Different data providers measure the same things in different ways, so numbers from different sources may not match exactly. While I have tried to keep everything accurate, I cannot guarantee that it is complete or error-free, and figures will change over time.

The author is not responsible for any decisions made or actions taken based on this post. Please consult a qualified professional before acting on anything you read here. The views expressed are my own and do not represent any organization I am affiliated with.

If you spot an error, or if you would like any section corrected or removed, please reach out through the contact page and I will review it promptly.