Private Equity vs Hedge Fund: Difference and Comparison

While many individuals prefer investing in mutual funds, stocks, and bonds, investors, on the other hand, strengthen their portfolios and venture into private equity and hedge funds. These funds are classified under-investment forms that attract Limited Liability Partnerships or Companies.

However, despite having similar investor profiles, private equity and hedge fund remain significantly different.

Key Takeaways

  1. Private equity firms invest in and acquire private companies, focusing on long-term value creation, while hedge funds use diverse investment strategies to generate high returns for their investors.
  2. Private equity investments often involve active management and operational improvement of portfolio companies, whereas hedge funds focus on financial returns through trading and investing.
  3. Private equity funds have longer investment horizons, while hedge funds can have shorter-term, more liquid investments.

Private Equity vs Hedge Fund

Private equity is the capital that people invest to claim full ownership of a business enterprise or organization, which takes seven to ten years, and there is low risk involved. Hedge fund is an investment done by pooling funds while different strategies are used to ensure high profit.

Private Equity vs Hedge Fund

Comparison Table

Parameter of ComparisonPrivate EquityHedge Funds
Capital InvestmentInvestment is directly made in the enterprise.Investment is made in the highly liquid assets of the enterprise.
Investment TimeThe average 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

What is Private Equity?

Private equity refers to the capital individuals invest to gain ownership of a business enterprise.

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Private equity acts as venture capital where accredited investors invest in the business to manage, grow, and 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

What is Hedge Fund?

Like a vestment partnership, a hedge fund refers to an investment made by pooling funds where several strategies are employed to ensure investors make high profits.

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

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

hedge fund

Main Differences Between Private Equity and Hedge Funds

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 the time horizon.

The following discusses the differences between private equity and hedge fund.

Capital Investment

Private equity and hedge fund differ because accredited investors invest capital. 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 significantly different investment times. Private equity concentrates on the long-term profit potential of an investment in a company.

However, private equity investors are neither interested in the company’s acquisition nor in running or 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 to invest in highly liquid assets is to assist investors in quickly shifting from an investment to a more promising one. With a theme of making gains as soon as possible, 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 that its current market cannot be readily determined or transferred for a certain period.

Hedge funds, on the other hand, are open-ended investment funds. 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.

Strategy

Private equity is invested by purchasing an entire enterprise or acquiring 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 and 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. The investors’ funds are pooled to invest in a range of securities, with the help of different investment techniques to generate returns per the specified risk level.

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

Risk Involved

Both private equity and hedge funds offset high-risk investments or safer investments. However, a hedge fund’s risk levels are significantly higher than private equity’s.

The high risks in hedge funds are attributed to focusing on making the highest returns in the shortest investment time frame.

Difference Between Private Equity and Hedge Fund
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