Difference Between Hedge Fund and Venture Capital (With Table)

Hedge Fund vs Venture Capital

The ultimate goal of a business is to make money. To tread on the path of a successful business, you may need to follow some strategies.

These strategies may require you to modify your business model, analyze your target market, and attract investors to your business.

Two of the widely used techniques that can bring investors to your business are hedge funds and venture capital. Both of these funds aim to generate returns or profits through smart investments.

But they both have some fundamental differences that both the investors and the businesses should know to avoid confusion.

The main difference between Hedge Fund and Venture Capital is that hedge funds refer to those investment funds where there is a high chance of producing a larger return on investment.

Venture capital funds, on the other hand, are those funds that are acquired from investors and then later invested in start-ups.

They try to support new businesses that have the potential to grow into a big business. Both of these have goals to make money but they use different strategies to reach this goal. The other features that differentiate between the hedge fund and venture capital are shown in the comparison table below.


Parameter of ComparisonHedge FundVenture Capital
DefinitionThose investment funds with a high chance of winning return on investments.Those funds acquired from investors which are then invested in start-ups.
StrategyInvest in highly liquid assets to gain profit.They obtain equity only and have an exit strategy in mind.
FeesThey charge fees to investors.They share the profit and income made by the business.
SkillsKnowledge of finance, market, and risk assessment.Communication skills, dealing experience, and knowledge of investment opportunities.
IndustriesVariety of assets- stocks, foreign exchange, commodities.Information technology, biotechnology, etc.

 

What is Hedge Fund?

Hedge Funds are funds obtained from investors that are used in different investment strategies to earn a return on investment.

They identify their target market and take advantage of this opportunity by pooling in funds from those investors.

This fund strategy is expensive than the others because it follows the Rule of Two and Twenty. They charge a two percent fee for managing the assets and then take twenty percent of the overall profit earned.

Hedge funds are usually acquired from qualified investors. That means those investors whose net worth is almost a million dollars.

They can invest in almost anything – stocks, land, foreign exchange, real estate, and commodities like gold or oil.

Their fee structure Two to Twenty rule often faces criticism. Because the hedge fund manager still gets 2% of the assets even if he loses all the money.

So, some limitations have been placed for those who invest in hedge funds. Portfolio managers are prevented from obtaining the same return twice through fee limitations procedures like high-water marks.

If you are looking for reliable hedge funds, you may need to consider some factors in mind. Investors need to have sufficient knowledge in financial and risk assessments. They should know what is happening out there in the market.

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The investor should identify the right metrics that can provide the required results.

Hedge Fund 1
Hedge Fund
 

What is Venture Capital?

Venture Capital Funds are those funds you acquire from investors which you need to invest in small businesses and young start-ups.

It is similar to private equity. You invest money in these start-ups because you see a huge potential in them to move forward and earn your profits.

Venture capital funds are risky in this regard but once the companies are set up, it can reap your benefits. You share their income and obtain profits. You also get the right to make some of the decisions for the company if needed.

Venture capital funds are acquired from wealthy individuals who are themselves successful entrepreneurs or have retired after building business empires. These investors are called “angel investors”.

Venture capital funds require knowledge of good-dealing experience and great communication skills.

If the business is looking for venture capital, then you need to come up with a fully developed business plan. The plan or proposal is submitted to the angel investors or venture capital firms.

They evaluate your proposal by investigating details about your business model, your product, and management to see if you qualify for the venture capital.

Venture Capital
Venture Capital

Main Differences Between Hedge Fund and Venture Capital

Some of the features that differentiate between the hedge fund and venture capital are given below:

  1. Hedge funds are those investment funds with a high chance of winning return on investments. Venture capital funds are those funds acquired from investors who are invested in start-ups.
  2. Hedge fund managers invest in highly liquid assets to gain profit while venture capital managers obtain equity only and have an exit strategy in mind.
  3. Hedge fund investors charge fees to investors according to the Two and Twenty Rule whereas venture capital investors share the profit and income made by the business.
  4. Hedge fund investors should know finance, market, and risk assessment whereas the important skills for venture capital investors are communication skills, dealing experience, and knowledge of investment opportunities.
  5. Hedge fund investors are typically interested in a variety of assets- stocks, foreign exchange, and commodities while venture capital fund investors are interested in information technology and biotechnology sectors.


 

Conclusion

All the great business models in the world use some kind of fund investment strategies as a way to prosper in the business world.

If you look at big companies like Uber and Airbnb, they started as start-ups and developed greatly because venture capitalists contributed to these.

They provided market strategies and business advice to improve their business model.

Similarly, different hedge funds like BlackRock provide funds and use different strategies to earn money.  A great example is that of Warren Buffet. He also made millions by running a hedge fund.

So, it all comes down to making smart choices and choosing what is best for your business model.


 

Word Cloud for Difference Between Hedge Fund and Venture Capital

The following is a collection of the most used terms in this article on Hedge Fund and Venture Capital. This should help in recalling related terms as used in this article at a later stage for you.

Difference Between Hedge Fund and Venture Capital
Word Cloud for Hedge Fund and Venture Capital

 

References

  1. https://www.placementtracker.com/samplereports/Does%20Investor%20Identity%20Matter%20An%20Empirical%20Examination%20on%20Investments%20by%20Venture%20Capital%20Funds%20and%20Hedge%20Funds%20in%20Pipes.pdf
  2. https://www.worldscientific.com/doi/abs/10.1142/9789812569448_0005
  3. https://ideas.repec.org/a/ris/jofitr/1338.html
  4. https://archive.nyu.edu/jspui/bitstream/2451/27451/2/SSRN-id913362.pdf