Hedge Fund vs Private Equity
Are there distinct differences between hedge fund and private equity? Regardless of the case, it is worth noting that the two are unregulated and in recent cases, there have been cases where the groups are getting into the other’s domain. Generally, private equity puts a lot of value concentration on a few companies. At around 2006/2007, there were several club deals, where firms were collaborating to raise enough money for a given deal to go through. In such cases, these firms work closely once they become the owners of the portfolio organizations. This is necessary because they work towards increasing the value of the company through improved management and efficiency.
While the companies earn overtime dividends, they make real money during Initial Public Offers (IPOs) and when they sell a company. On the other hand, hedge fund offers a wider spectrum of short-term investments. Here, a host of strategies are used to achieve the desired results. They may include long or short term, macro and credit among others. Another important attribute of hedge funds is that trading time can range between milliseconds and years. Most of these funds remain in liquid securities to allow them to trade at any point and lock in their income.
One of the main differences, which stand tall between hedge fund and private equity, is liquidity. On a general scale, hedge funds are invested within the market and in cash. For this reason, they are marked to the market on a daily basis because they are liquid. It is important to note that hedge fund investors are allowed to get back their money after a period of one-year lock-up. This can take place within forty-five days after you write a notice. To the contrary, private equities have longer lock-up period of five years or more.
Another distinct difference is based of the types of investments, which they make coupled with their holding period. It is essential to underscore the fact that hedge funds mostly invest in tradable securities, which may include derivatives, bonds, foreign exchange, futures, stocks, swaps, and commodities. Additionally, these companies may hold the investments for a short period, which may be even minute. On the other hand, private equities have a tendency of buying long-term assets, which may include private companies and real estate. This happens because investors in this kind of funds understand that they are locking the assets in question for a much longer time compared to their hedge fund counterparts. Moreover, private equities have capital calls, which require investors to make additional capital towards the fund. Nonetheless, hedge and private equities usually have structures that can accommodate such events.
Besides the fact that hedge fund and private equity exhibit a host of differences, they also have some elements in common, which constitute to their similarities. Firstly, they are alternative investments, which have a higher risk degree as compared to retail investment. In addition, they are marketed to institutional and certified investors. Another similarity is that they invest from capital, which is contributed by limited partners and their compensation towards the management is based on profits realized and the assets that are under management, upon which a fee is charged. They also give managers a wider spectrum that allows them to realize the goals of investors.
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