Difference Between Private Equity and Hedge Fund

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.

Private Equity vs Hedge Fund

The difference between Private Equity and Hedge Fund is that Private equity has a lesser risk than a hedge fund. Private equity means to acquire a small company and sell for high rates, hedge funds try to give more profit in a limited time. Private equity is for long term gain and hedge fund is for short term gain.

Private Equity vs Hedge Fund

Comparison Table

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

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

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

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.

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.

Difference Between 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://repository.uchastings.edu/cgi/viewcontent.cgi?article=3711&context=hastings_law_journal
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3 thoughts on “Difference Between Private Equity and Hedge Fund”

    1. Piyush Yadav

      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.

  1. For me and my family, I have always considered private equity to be the best option for investment. Good to know how it differs from hedge funds.

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