Hedge Funds vs Private Equity
Hedge funds and private equity are both forms of investment vehicles that pool funds from a number of wealthy investors with the aim of making large profits. The two, however, are quite different to each other mainly in terms of the types of investment vehicles towards which they contribute their funds. The following article provides the reader a clear outline of what each type of fund is, explaining how they are different to one another.
Hedge Funds
A hedge fund is much more aggressively managed and often undertakes more high level and risky investment strategies. These funds can operate within the domestic and international markets and are managed in a manner that offers the highest return. As a result of the risky investments that are made, hedge funds are mostly open to a selected number of sophisticated investors and require them to make a very large investment. Furthermore, they require the funds in a hedge fund to be held for a minimum of one year, which reduces liquidity for its investors. Since hedge funds are only open to a number of private investors, they are not regulated by SEC and are not required to submit reports on their performance. However, they are also subject to a fiduciary duty on their income.
Private Equity
Private equity is the capital that is invested in private companies by individual or institutional investors. Private equity may also be referred to as the private funds that are invested in buying a public firm thereby de-listing it from the stock exchange. Private equity funds also undertake leveraged buyouts where debt is issued to gather funds to buyout a public firm. These public firms are privately acquired through buyouts so that they can be turned around, and finally sold to another firm or publicly listed. The investment made in a private company needs to be committed for longer periods of time; therefore, usually made by wealthy individuals or institutional investors.
Hedge Fund vs Private Equity
Hedge funds and private equity funds are very different in terms of the investments that each make. Hedge funds usually make investments in securities such as stocks, bonds, swaps, futures, options and employ complicated investment tactics in their investments. Private equity investments are usually made in private companies that do not sell shares on a stock exchange.
Both private equity and hedge funds require substantial investments to be made, and both types of funds can borrow money from banks and financial institutions to make further investments. Profits made by hedge funds are through price fluctuations (buying at a low price and selling for a higher price). Private equity firms, on the other hand, usually make profits by buying a company, developing it and selling it at a much higher price or by selling shares on a stock exchange.
Summary
• Hedge funds and mutual funds are both forms of investment vehicles that pool funds from a number of wealthy investors with aims of making large profits.
• Hedge funds and private equity funds are very different in terms of the investments that each make. Hedge funds usually make investments in securities such as stocks, bonds, swaps, futures, options and employ complicated investment tactics in their investments
• Both private equity and hedge funds require substantial investments to be made, and both types of funds can borrow money from banks and financial institutions to make further investments.