Hedge Fund

What is the difference between a private equity fund and a hedge fund?

A Private Equity Fund and a Hedge Fund might sound similar to people who are not too familiar with the alternative investment industry. There is a huge difference in the way in which investment is made in these industries.

Private Equity fund includes privately managed pools of capital that is invested in companies, most of which are not listed on the stock exchange yet. There might be a few commonalities in the structure of a private equity fund and a hedge fund, but the major difference is in their investment strategies. Private equity funds ideally invest for a longer term in private companies and anticipate capital appreciation based on the growth and sustainability of the companies that they have invested in. It can also involve merger and acquisition of companies. Private equity definitely is a higher risk investment as compared to stocks or bonds, but also the returns expected are a lot higher. Investors and fund managers in private equity funds should understand the high risk high return principle. Private equity fund managers might offer their advice to a growing or start up company to help it grow towards a suitable position for an IPO (initial public offering).

For Hedge Funds, there is a no defined pattern and area of investment. It is an unorganized investment and is also not allowed in some countries as it is hard to monitor. A hedge fund generally invests in stock markets (short term), real estate, bonds, other funds and privately owned companies. It is a lot more riskier than Private Equity funds, but the returns can be higher when compared (higher risk higher return). The privately managed investment pools in a hedge fund are not subject to Securities and Exchange Commission (SEC) examinations. 

What is Venture Capital?

Venture capital is a subset of private equity. It involves equity investments, ideally in comparatively newer companies (as compared to typical private equity investments) which are just launched or planning a start up or for expansion of a business. Venture Capital funds invest in young companies often developing a new product or technology.

Venture capital is majorly categorized by the progress of development of the company ranging from early stage capital investment used for the initiation of the start up companies to late stage and growth capital investment that is used to fund growth of business that is generating profit but might not yet be profitable or generating enough capital to fund future growth. 

Entrepreneurs often come up with ideas and products that require substantial amount of capital in the start up stage or for the first few years. Many entrepreneurs do not have enough capital to finance the business by themselves, and they must therefore seek outside financing. The venture capitalist's need to generate high profits to compensate for the risk these investment which makes venture funding an expensive capital source for companies. Venture capital is most appropriate for businesses with large capital requirements which cannot be financed by cheaper alternatives such as debt.