Although private equity funds and hedge funds play a similar role in the investing world, they both function in very different ways. Most hedge and private equity funds cater to the wealthy. They typically set their investment minimums at $250,000. Return-on-investment is the primary goal of both types of funds, but the way they achieve high ROIs is not the same.
Hedge funds typically invest in liquid assets that can deliver returns as fast as possible. The funds then use those returns to invest in other assets with immediate promise. Hedge fund analysts invest in an assortment of asset classes, including stocks, bonds, currencies, credit derivatives and commodities. Whatever investment can deliver the highest returns in the shortest time possible is a target for hedge fund managers. The bottom line is managers look for profit in any market.
Private Equity Funds
On the other hand, private equity funds typically invest for the long term. For the most part, these funds put money directly into a company hoping to achieve long-term returns. Many of these funds target distressed companies and try to gain a controlling interest through stock purchases. Instead of breaking up the distressed companies and liquidating their assets, private equity funds will attempt to turn the companies around by streamlining their day-to-day operations or making management changes.
The key difference is private equity funds maintain a long-term outlook while hedge funds look for quick returns. Additionally, investors in private equity must commit to their investment for a certain period of time whereas hedge fund investors can liquidate their investments at any time.
Both funds maintain a level of investment risk. However, since they both cater to wealthy investors, they mitigate risk by hiring highly-regarded professionals with a proven track record of delivering returns. They also implement proven risk management solutions that are built to withstand volatile markets. However, most financial experts agree that hedge funds are riskier since the focus is on quick returns.
The Bottom Line
Investors should keep in mind that hedge funds and private equity funds do not have the same level of protection as investing in securities. The majority of private equity funds invest in companies that are not traded on the open markets and not subject to the rules and regulations of the Securities and Exchange Commission.