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What is Private Equity?
Private equity is an investment fund. In finance, private equity (PE) refers to funds as limited partnerships (LPs) that acquire and restructure weak financial companies.
A private equity fund consists of two assets: financial equity and debt and equity securities. It is a financial management mode for operating private corporations not listed on a stock exchange.
However, private equity funds are invested directly through an investment management company (private equity firm) or by a venture or angel investor to the targeted companies.
The investment aims to improve profits by setting specific financial goals with different management and strategic policies. Each investor has preferences for that targeted company for capital investments.
They invest in developing new products or services by restructuring operations, management, and formal ownership to achieve their financial goals and for company expansion.
A private-equity fund is a type of private capital used to finance long-term investments in an illiquid company.
A hedge fund is an accumulated or pooled investment or fund traded in liquid assets. It can be used in more extensive and complex trading, like portfolio construction, by using risk management techniques for improving performance like short selling, getting benefits, derivatives, etc.
However, financial regulators restrict hedge fund marketing to authorized and endorsed investors, high-worth individuals, and institutional investors. You can consider hedge funds as alternative investments.
Unlike mutual funds and exchange-traded funds, regulated investment funds available to the retail market, mutual funds and ETFs can use leverage and more complex investment techniques.
Additionally, hedge funds are distinct from private equity and similar closed-end funds. So, hedge funds relatively invest in liquid assets and are usually open-ended. It means hedge funds allow investors to invest and withdraw capital periodically per needs.
However, regarding regulations of funds, modern hedge funds can utilize various financial instruments and risk management techniques, so their strategies, risks, volatility, and expected returns can vary significantly.
The goal of hedge fund investment strategies is to achieve a positive return on investment regardless of market conditions.
Difference Between Private Equity and Hedge Funds
There are a few similarities between private equity and hedge funds: both allow pooling money to invest in different assets like bonds, stocks, real estate, etc. Still, there are a few differences between them. Private equity firms have longer investment plans than hedge funds.
Private equity funds are invested in smaller companies that want to expand but cannot do so due to a shortage of capital. Thus, private equity invests in the long term, which lasts for at least ten years. The period of private equity fund investment is long-term.
At the same time, hedge funds are invested in different assets like bonds, currencies, commodities, stocks, etc., for the short term only.
Private equity firms pool capital from large institutional investors, like insurance companies and pension funds looking for long-term investment returns.
Unlike private equity, hedge funds accept money from individuals and institutions. Firms or businesses use hedge funds with more strategic and speculative investment plans than private equity to raise profits over their investments.
Comparison Between Private Equity and Hedge Funds
|Parameters of Comparison||Private Equity||Hedge Funds|
|Market||Private equity makes investments directly or indirectly in private companies.||Hedge funds are invested in publicly traded companies.|
|Investments||Closed-ended investment plan.||Open-ended investment plans.|
|Purpose||Make profits by company’s growth.||Get a good return on investment in comparatively less time.|
|Time-Period||Long-term investment.||Short-term investment.|
|Ownership||Yes, one can get ownership as a stakeholder.||No direct or straight ownership.|