Difference Between Private Equity and Hedge Fund (With Table)

Private Equity vs Hedge Fund

The key difference between Private Equity and Hedge Fund lies in the fact that private equity has lesser risk compared to a hedge fund.

Private equity acquires a small company and makes it better to sell for high rates in the future, whereas hedge funds try to give more profit in a limited period of time.

Private equity aims for long term gain while hedge fund aims for short term gain.

While many individuals prefer investing in mutual funds, stocks, and bonds, investors, on the other hand, strengthen their portfolio and venture in private equity and hedge funds.

Both of these funds are classified under-investment forms that attract Limited Liability Partnerships or Company.

However, despite having similar investor’s profiles, private equity and hedge fund remain to be significantly different. The following is the definition of each of the terms and the key differences between them.

 

What is Private Equity?

Private equity refers to the capital invested by individuals to gain equity ownership in a business enterprise.

The private equity acts as venture capital where accredited investors invest in the business with the aim of managing, growing, as well as later sell the assets.

Additionally, private equity is also used in converting the public company to a private domain, making the enterprise enjoy less scrutiny from public investors.

Notably, an investment takes three to five years to become fully realized.

Private Equity 1
Private Equity Example
 

What is Hedge Fund?

Similar to vestment partnership, hedge fund refers to an investment made by pooling funds where several strategies are employed in ensuring investors make high profits.

Under hedge funds, investments are made initially in highly liquid assets.

The goal in so doing is to quickly generate returns on one investment and later move the money to another promising investment.

Hedge Fund
Hedge Fund Example

 

Comparison Table Between Private Equity and Hedge Fund (in Tabular Form)

Parameter of ComparisonPrivate EquityHedge Funds
Capital InvestmentInvestment is directly made in the enterprise.Investment is made on the highly liquid assets of the enterprise.
Investment TimeAverage investment time is seven to ten years.Investment is made between a few days to a few years.
Structural DifferenceClosed-ended investment fundOpen-ended investment fund.
StrategyInvestment involves the firm’s highly liquid assetsInvestment is made by purchasing the whole enterprise or selected assets.
Risk InvolvedLow-risk level involvedHigh-risk level involved

Main Differences Between Private Equity and Hedge Fund

Private equity and hedge fund differ from each other in the way each operates.

The differences include the terms, capital investment, the risk involved, the strategy applied, and time horizon.

The following is a discussion of the differences between private equity and hedge fund.

Capital Investment

Private equity and hedge fund differ in that capital are invested by accredited investors.

When investing in private equity, investors commit the capital they wish to invest; hence, money is invested only when called upon. Notably, investment is made directly in companies.

On the other hand, investors in a hedge fund only invest their money in one go.

However, the cash invested can be liquidated at request. Notably, the investment in a hedge fund is made in highly liquid assets.

Investment Time

Private equity and hedge funds have a significantly different investment time.

Private equity concentrates on the long-term profit potential of an investment in a company.

However, private equity investors are neither interested in the acquisition nor running of the company, or in investing in companies requiring a turnaround.

The average investment time for private equity ranges between five and seven years.

On the other hand, hedge funds are focused on the short-term profit potential of an investment in a company’s highly liquid assets.

The preference by hedge fund managers in investing in highly liquid assets is to assist investors easily shift from an investment to a more promising one quickly.

With a theme of making gains as soon as possible, the hedge funds can last for a few days to years.

Structural Difference

The legal structure of private equity and hedge funds is different. Notably, private equity falls under a closed-ended investment fund.

Its structure follows the fact that its current market cannot be easily determined or transferred for a certain period.

Hedge funds, on the other hand, are an open-ended investment fund. The hedge funds’ structure follows the fact that there are no restrictions on the transferability of the funds.

Additionally, the assets involved in a hedge fund are market to market.

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Strategy

Private equity is invested by the purchase of an entire enterprise or by the acquisition of selected assets that belong to the firm.

In most cases, businesses, where private equity is invested, are underperforming.

Therefore, private equity investors purchase the businesses or assets to improve the firm’s performance using their professional expertise.

Unlike private equity, hedge funds are managed as well as operated by investment professional market traders.

The traders move in and out of financial instruments looking for the best possible returns from investments in the subject enterprise.

Funds of the investors are pooled to invest in a range of securities, with the help of different investment techniques to generate returns as per the specified risk level.

Notably, the investors reach out for the highest risks in a quest to reach the highest possible returns.

Risk Involved

Both private equity and hedge funds offset high-risk investments or a safer investment.

However, risk levels in a hedge fund are significantly higher compared to private equity.

The high risks in hedge funds are attributed by the focus on making the highest returns on the shortest time-frame of an investment.


 

Frequently Asked Questions (FAQ) About Private Equity and Hedge Fund

📹 ⚙ Is Berkshire Hathaway a Hedge Fund?

Berkshire Hathaway is technically a holding company and not a hedge fund. Traditional hedge funds started as limited partnerships and Berkshire isn’t one.

Although it operates in similar ways as a hedge fund in terms of stocks and security investments, it doesn’t take performance-based fees on positive returns that are generated yearly.

It is instead traded with the BRK symbol on the NYSE and the company’s employees make money from stock bonuses and their salaries.

📹 What is the Biggest Hedge fund in the world?

The Connecticut-based Bridgewater investment management firms are the largest in the world in terms of their assets. As of 2019, the firms have $180 in assets.

The firm utilizes a global style that specializes in currency exchange, gross domestic product and inflation in the US.

It initially began as an investment advisor and paved the way for parity investments which were risky in 1996. Bridgewater seems to prove the fact that large funds can be highly profitable.

📁 Is a private equity firm a Hedge Fund?

Both private equity and hedge funds share some similarities. They both raise and acquire capital from investors from the outside called Limited Partners and then invest in assets or companies.

Their objective is to earn higher returns then charge a percentage of those returns as their performance fees. They can also take a management fee.

📁 Is private equity an alternative investment?

Private equity refers to capital investment designed to bring positive change to a company such as growing a business, bringing about operational change, financing an acquisition and taking a public company private.

A private equity investment can be classified as an alternative investment. A company that is not traded on the stock exchange, publicly owned or quoted can be owned in portions by individuals.

Private equity strategies of investment include investing growth capital, executing leveraged buyouts and contributing venture capital.

📵 What is the largest private equity firm?

Blackstone is the largest private equity firm. It has its headquarter in New York and holds other offices in big financial centers all over the world.

Blackstone offers a myriad of offer services and investment products including real estate, credit, hedge funds, and private equity.

The firm employs 2,400 staff and claims $545.5 under management. It has 95 portfolio companies that rake in more than $82 billion annually in revenue.

The companies include Service King Collision Repair Centers, Versace, Vivint and Scout 24. Between January 2014 and April 2019, Blackstone raised $82.9 billion, making it earn the title.


 

Infographic

Private Equity vs Hedge Fund

 

Learn More With the Help of Videos

Private equity

Hedge fund


 

Conclusion

From the comparison above between private equity and hedge funds, it is evident that the two differ in how they operate despite having similar investment profiles.

While private equity funds are long-term closed-ended investments, hedge funds are short-term open-ended investments.

However, both investments have a certain risk level associated with each with hedge funds exhibiting a high-risk level than private equity funds.


 

Word Cloud for Difference Between Private Equity and Hedge Fund

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

private equity and hedge fund
Word Cloud for Private Equity and Hedge Fund

 

References

  1. https://hbr.org/2007/09/the-strategic-secret-of-private-equity
  2. https://www.econstor.eu/bitstream/10419/48434/1/587947438.pdf?origin%3Dpublication_detail
  3. https://heinonline.org/HOL/LandingPage?handle=hein.journals/nwjilb29&div=21&id=&page=
  4. https://repository.uchastings.edu/cgi/viewcontent.cgi?article=3711&context=hastings_law_journal

2 thoughts on “Difference Between Private Equity and Hedge Fund (With Table)”

    • Hi honey,
      there are so many factors at play. the main point to consider before making a decision between private equity and hedge fund is the risk involved.

      Reply

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