Private Equity vs Hedge Fund – Difference and Comparison

What is Private Equity?

It is an investment collaboration that purchases and runs companies and later sells them.

They run investment funds for corporate and certified investors.

Private equity investment buys private or public companies entirely or invests in such an acquisition as part of a company.

They do not involve themselves in companies that are cataloged on a stock exchange.

The participants in this capital class are obliged to give significant capital for a given period. This is the reason why entrance to this type of company is restricted to corporates and investors who are well-to-do financially.

Outside investors in private equity are the ones who lend capital to fund acquisitions and management

This kind of entity has grown very fast; it becomes so much preferred when supply prices hike and the cost of borrowing goes low.

In most cases, whenever a company is acquired by private equity, it becomes much more competitive and riskier with unmanageable debts, relative to the private equity entity’s skills and objectives.

What is Hedge Fund?

A hedge fund is a financial partnership in which members put together their funds and earn reasonable returns from different investment undertakings

This kind of fund was launched in 1949 by a former Fortune magazine writer and sociologist by the name of Alfred Winslow Jones.

He invented strategies for the fund to bring profit despite whether the stock market went up or down, thus minimizing risk. This fund strategy is where hedge funds derive their name from.

A hedge fund is composed of professional fund operators, also referred to as general partners and high-profile investors.

The objective of this come-together is to pool a large amount of money and then invest with the hope of maximizing the profits of all the investments while still minimizing risks.

To be a member of a hedge fund, one has to become an accredited investor, whereby you have to have earned an annual income of over $200,000 in the past two years and must expect to make the same amount or much more in the year at hand.

If you don’t meet these requirements, then you must have at least a $1 million net worth.

Difference Between Private Equity and Hedge Fund

  1. Private equity is funds used by investors to make investments in private sector. A hedge fund is about private limited companies raising funds from investors and then investing again into financial instruments with minimum risks.
  2. Levels of risk in Private equity funds are less in comparison to hedge funds.
  3. The investors in private equity funds act as active participants, whereas the investors in hedge funds are less active.
  4. Control over operations by the investors in private funds is at a high level, while hedge funds have limited control over assets.
  5. Investment funds in private equity are closed-ended different from open-ended hedge funds.

Comparison Between Private Equity and Hedge Fund

Parameter of ComparisonPrivate EquityHedge Fund
DefinitionAre funds used by investors to make investments in private sectors or acquisition of companies that are publicly recognized on the stock exchange Private limited funds companies raise funds from investors and then invest again into financial instruments with minimum risks are the hedge funds
Levels of RisksPrivate equity is less riskyHedge funds carry higher levels of risks
Investors ParticipationInvestors act as active participantsThe investors are less active
Control over operationsThe control of operations by investors is at a high levelInvestors have a low level of control over operations
OpennessInvestment funds are close-endedInvestment funds are open-ended