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How Do Hedge Funds Differ From Private Equity Funds?

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Although hedge funds and private equity funds may appear to be similar at first, but they are actually very different terms. This could seem confusing to a newbie investor. So, for your convenience, we’ve listed the differences between hedge funds and private equity funds in this blog.

Difference between hedge funds and private equity funds

Source: Freepik

Even though their investor profiles are often identical, hedge funds and private equity funds follow different goals and styles of investments.

Hedge funds and private equity funds are for high-net-worth individuals. We often structure hedge funds as limited partnerships that pay the operating partners minimal management fees plus a share of the revenue.

There are many significant differences between these funds, and we got them all covered in this article.

Let us begin.

Hedge Funds

Hedge funds are an alternative investment strategy. It employs plans to create dividends for its stakeholders using pooled funds. A hedge fund’s goal is to have the highest potential investment returns as soon as possible.

Hedge Funds in Depth

Hedge funds invest in selected securities shares, commodities futures, currencies, arbitrage, and derivatives—whatever the fund manager regards as delivering large potential profits in a brief time.

Hedge funds are pricier for investment than mutual funds. Hedge funds have a higher expense ratio and a performance premium.

Private Equity Funds

Private equity is a private investment that occurs outside public markets and involves funds and investors directly investing in businesses or buying them out.

Private Equity Funds in Depth

After acquiring or holding an interest in a company, private equity firms attempt to develop it, whether by personnel changes, streamlining operations, expansion, or selling the company for a profit, whether privately or through an IPO (Initial Public Offer) on a stock exchange.

Understand difference between hedge funds and private equity funds
Source: Freepik

Difference between both the Funds

1. Liquidity and Lock-in

Hedge funds and private equity firms usually need significant deposits, ranging from $100,000 to $1 million or more per investor. Hedge funds lock the invested funds for a higher period, and investors cannot release their money until the lock-in period is over.

A private equity fund lock-in period is significantly higher than hedge funds. Typically, it can be 3, 5, or 7 years. Therefore, a private equity fund is less liquid and invested in businesses, and businesses require more time to turn profitable.

2. The Investment Structure

Since most hedge funds are open-ended, investors can purchase or sell their shares.

Private equity funds are closed-ended, so after a set amount of time has passed, new capital cannot be invested.

3. Timeframe

Since we base hedge funds on liquid assets, investors may typically cash out their investments.

Private equity funds typically want the investors to commit their funds for a long term, minimum of 3-5 years, and sometimes can go up to 7-5 years.

4. Investment-related risk

Between hedge funds and private equity firms, there is a significant risk differential. Although both practice risk management by balancing higher-risk and lower-risk assets, hedge funds’ emphasis on maximizing short-term returns involves a higher level of risk.

Since hedge funds are not subject to the same investor protection rules as other securities, they aim to use several higher-risk strategies for potentially higher returns, such as short selling, derivatives, and arbitrage.

Private equity fund investors and hedge fund investors have a better risk appetite. The private equity funds invest over an extended period. Both the options thus have their unique features.

Whichever fits your requirement and convenience the best, go for it.

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