Definitions and meanings
Private equity Fund:
Private equity fund is an investment mechanism which pools in funds from various institutions and high net worth individuals and invests the same across various private stocks in line with its investment strategy. Such funds can invest directly in shares of private unlisted companies or buyout financially distressed companies. Private equity funds look to boost the performance of their investment companies by streamlining their management and operations. The goal is to ultimately liquidate their acquisitions and earn heavy profits for their investors. These funds are usually run by partnership firms. They are set up for specific periods and require long term commitment of investors – typically 5 to 10 years.
Hedge fund is an alternative investment mechanism which pools in funds from accredited and institutional investors and invests across different asset classes to earn high return for its investors. These include derivatives, stocks, debt instruments, currencies and other securities. Hedge funds often use significant leverage to try and earn higher returns. Hedge funds are actively managed to take advantage of market dips and peaks to earn high returns in shorter periods of time – as short as intra-day. Hedge funds can actively switch between different asset classes to take advantage of profit earning opportunities.
Difference between private equity fund and hedge fund:
While both these funds are typically used by high net worth investors, there are substantial differences between the two. The main points of difference between private equity fund and hedge fund have been detailed below:
1. Investment pool
Private equity funds invest only in stocks i.e.; equity shares of companies. Hedge funds, on the other hand, invest in a wide variety of asset classes such as derivatives, stocks, debt instruments, currencies and other securities. The choice of asset class depends on its investment strategy as well as which asset class is favorable for generating higher faster profits at the time of investment.
2. Investment strategy
Private equity funds seek to earn profits by investing in private companies generally start ups or emerging companies or in reviving distressed companies. Apart from monetary investment, these funds also involve themselves in the management and operations of these companies to help them grow ultimately increasing the value of their own investment. Hedge funds on the other hand look to earn quicker profits by taking advantage of expected quick changes such as market highs and lows, pricing arbitrage, anticipated company re-organisations and the like.
3. Investment timeline
Private equity funds require commitment from the investor for investment amount which is called upon as and when required. Hedge funds require investment at one go by investors.
4. Return time-frame
Private equity funds have a longer time-frame for earning return as they invest in companies which can potentially make substantial profits over a longer time period – up to 10 years. Hedge funds look to earn returns over much shorter periods by dealing in more liquid asset classes – as short as a few days.
Private equity funds have long term vision and focus and are close ended investment schemes. Investors are required to commit their funds for a specific period of time, hence their investments tend to be illiquid during that period.
Hedge funds are open ended investment schemes and employ their funds in more liquid assets looking to book quick profits, hence the investors enjoy better liquidity.
Although both funds have high risks attached to their investments, hedge funds are generally associated with higher risk as they often employ leveraging to earn high returns.
Conclusion – private equity vs hedge fund:
While both private equity funds and hedge funds appeal to high net worth and institutional investors as they aim to earn high profits and deal in high value of investments, they both have completely different investment strategy and focus. Private equity funds look for high returns over long term, hedge funds look for high, often riskier returns in shorter periods. Investors can thus choose between these funds as per their own investment goals and risk appetite.