What’s the difference between a hedge fund and a private equity firm?
Private Equity funds generally make highly concentrated bets on the equity of a few companies. Although they had generally preferred to take complete control, in the bull market of 2006/2007 deals became so large that they were forced to do “club deals”, partnering with other firms to find enough capital to get a deal done. Once they become owners of these portfolio companies, they generally work closely with management to improve operations in order to make the company more valuable. They will pay themselves dividends over time, as possible, but the real money is made when either the company is sold or IPOs.
Hedge funds, on the other hand, make a broader set of short-term investments. There are many strategies that are used (long/short equity, credit, macro, stat arb, etc) and trades can last from milliseconds to years. Many hedge funds prefer to stay in relatively liquid securities so that they can trade out at any point in time to lock in their profits
Hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital.
Private equity firms and hedge funds are like in that both invest from a leveraged pool of capital normally contributed by limited partners; both compensate the management team based on a percentage of profits (typically 20%) as well as charge a fee on assets under management (typically 2%); and both are lightly regulated (as of this writing).