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.
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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.
|Parameter of Comparison||Private Equity||Hedge Funds|
|Capital Investment||Investment is directly made in the enterprise.||Investment is made on the highly liquid assets of the enterprise.|
|Investment Time||Average investment time is seven to ten years.||Investment is made between a few days to a few years.|
|Structural Difference||Closed-ended investment fund||Open-ended investment fund.|
|Strategy||Investment involves the firm’s highly liquid assets||Investment is made by purchasing the whole enterprise or selected assets.|
|Risk Involved||Low-risk level involved||High-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.
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.
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.
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.
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.
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.
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.
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.
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