What is the difference between private equity funds and hedge funds? I read in Business Weekly that the pension funds, endowments of universities and other large investors to invest in hedge funds and private equity funds. An accompanying chart shows that private equity funds have had much higher returns than hedge funds in 2006 and 2007, but also greater losses in 2008. What is the difference between the two? Did they invest in different products? If not, on what basis would a pension fund choose to invest in one or the other? Thank you!
Interesting question. Both represent different asset classes, with cycles of return on their own. The pension funds and other endowments seek exposure to different asset classes to diversify their risks.
Hedge funds typically invest in publicly traded securities, currencies, derivatives, etc., and presents interesting strategies. There is a long list of these strategies, with names such as portable alpha, absolute return, 130-30, long-short, STAT-arb, and so on. But these investment vehicles are lightly supervised. Managers are encouraged by the participation in profits beyond the hedges. Their expertise is in the market, modeling, negotiation.
Private Equity Otoh corporate finance are more or kind frames. They usually try to find companies whose stocks have fallen on harder times, or, more generally, with a market value (including premiums OPA) is well below market value. They also buy private companies where there is an opportunity such as illiquidity, change of business model, death of a large holder, conflicts, etc. They do buybacks, to streamline the company, provide better management getting rid of unnecessary things, make good and attractive, and then resell to another buyer or re-IPO. It's their game. They are specialists in finance PAHO /, perhaps with some expertise in specific vertical.
HTH
Hedge funds = mutual fund for rich people.
(Although I note that it is not better than mutual funds. We can say that $ 25 T-shirt is better than $ 2 T-shirt, but its still a t-shirt. OF other hand, $ 300 t-shirt is just stupid. Many hedge funds are $ 300 T-shirts)
private equity funds = rich people who want to start a business
(Or tear it into small pieces for profit. Or build a big on a small.
Hedge funds manage money,
private equity and venture capital firms use to manage money.
Posted on January 8, 2010.
