Hedge Fund vs. Private Equity Fund: An Overview
Although their investor profiles are often similar, there are significant differences between the aims and types of investments sought by hedge funds and private equity funds. Both hedge funds and private equity funds appeal to high-net-worth individuals (many require minimum investments of $250,000 or more), traditionally are structured as limited partnerships, and involve paying the managing partners basic management fees plus a percentage of profits.
Hedge Fund. Hedge funds are alternative investments that use pooled funds and employ a variety of strategies to earn returns for their investors. The aim of a hedge fund is to provide the highest investment returns possible as quickly as possible. To achieve this goal, hedge fund investments are primarily in highly liquid assets, enabling the fund to take profits quickly on one investment and then shift funds into another investment that is more immediately promising. Hedge funds tend to use leverage, or borrowed money, to increase their returns. But such strategies are risky—highly leveraged firms were hit hard during the 2008 financial crisis.
Hedge funds invest in virtually anything and everything—individual stocks (including short selling and options), bonds, commodity futures, currencies, arbitrage, derivatives—whatever the fund manager sees as offering high potential returns in a short period of time. The focus of hedge funds is on maximum short-term profits.
In terms of costs, hedge funds are pricier to invest in than mutual funds or other investment vehicles. Instead of charging an expense ratio only, hedge funds charge both an expense ratio and a performance fee.
Private Equity Fund
Private equity funds more closely resemble venture capital firms in that they invest directly in companies, primarily by purchasing private companies, although they sometimes seek to acquire controlling interest in publicly traded companies through stock purchases. They frequently use leveraged buyouts to acquire financially distressed companies.
Once they acquire or control interest in a company, private equity funds look to improve the company through management changes, streamlining operations, or expansion, with the eventual goal of selling the company for a profit, either privately or through an initial public offering in a stock market.
Key Differences
Since hedge funds are focused on primarily liquid assets, investors can usually cash out their investments in the fund at any time. In contrast, the long-term focus of private equity funds usually dictates a requirement that investors commit their funds for a minimum period of time, usually at least three to five years, and often from seven to 10 years. There is also a substantial difference in risk level between hedge funds and private equity funds and both practice risk management.
Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom, Luxembourg, Ireland and the Cayman Islands. With a background in M&A, Matthew can also advise on portfolio transactional activities, commercial aviation contracts and associated regulatory matters. Learn more about Matthew Feargrieve online here. You can follow his latest updates on the Matthew Feargrieve page. You can also connect with him on the Matthew Feargrieve Linkedin page. Read the latest Matthew Feargrieve news here.
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