Venture Capital Resources

What's the difference between private equity funds and hedge fund?

I read in Business Weekly that pension funds, university endowments, and other big investors invest in hedge funds and private equity funds. An accompanying graph shows that private equity funds had much higher returns than hedge funds in 2006 and 2007, but also greater losses in 2008. What is the difference between the two? Do they invest in different products? If not, on what base would a pension fund choose whether to invest in one or the other? Thank you!

Public Comments

1. Interesting question. The two represent different asset classes, with their own returns cycles. The pension funds and other endowments seek exposure to different asset classes to diversify away their risks. Hedge Funds typically invest in publicly traded securities, currencies, derivatives, etc. and present some interesting strategies. There is a long list of these strategies, with names like portable-alpha, absolute-return, 130-30, long-short, stat-arb, and so on. But these are lightly supervised investment vehicles. Managers are incentivized by participation in profits beyond some hurdle. Their expertise is in markets, modeling, trading. Private Equity funds otoh are more corporate finance/executives kind. They typically try to spot firms whose stocks may have fallen on harder times, or, more generally, whose market value (inclusive of takeover premiums) is way below the business value. They also buyout private companies when there is an opportunity such as cash crunch, business model change, death of a large holder, disputes, etc. They do buyouts, streamline the company, bring in better management, get rid of useless stuff, make it fit and attractive, and then resell to another buyer or re-IPO. That's their game. They are ops/finance specialists, perhaps with some vertical-specific expertise. HTH
2. Hedge Funds = mutual funds for rich folks. (Although I will point out that this does not make them better than mutual funds. You can argue that a $25 t-shirt is better quality than a $2 t-shirt, but its still a t-shirt. On the other hand a $300 t-shirt is just stupid. Many hedge funds are $300 t-shirts) Private equity fund = Rich people who want to run a business (Or tear it into tiny little pieces for profit. Or built a big one out of small one. Hedge funds manage money, Private equity and venture capital want to manage businesses using money.