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Hedge funds6/14/2023 ![]() However, both fund types are increasingly converging.įor example, many hedge funds have been moving into deals and acquisitions of entire companies.Īnd large private equity firms like Blackstone have been moving into hedge fund-like strategies, sometimes even acting as funds of hedge funds. The description above is the “classical view” of the hedge fund vs private equity comparison. That exists because LPs don’t want to pay fees on returns that offset losses from previous years. So, if the fund’s previous highest NAV was $200, and it ends this year at $180, the performance fee will be $0 even if the fund earned a positive return in this year. Private equity fees have fallen a bit over time, but they’ve remained close to the traditional “2 and 20” model – a 2% management fee and 20% performance fee – while the average hedge fund now charges a management fee of under 1.5% and a ~15% performance fee.Īnd the trend is toward even lower management fees, with performance fees that scale up or down based on annual returns.įinally, “performance” is measured differently it’s linked to IRRs and hurdle rates at PE firms, but net asset value (NAV) relative to the high-water mark at hedge funds. ![]() While both types of firms have management fees and performance fees, hedge funds usually charge lower percentages for both because of market factors and poor post-financial-crisis performance. Hedge funds focus on finding mispriced financial assets and benefiting from quick gains in near-term, 12-month periods.īecause of this longer-term focus, PE firms require longer lock-up periods from their LPs, while redemptions are easier at HFs. The biggest difference is that PE firms tend to acquire entire companies using equity and debt, while HFs acquire very small stakes in companies or other liquid, financial assets such as bonds, currencies, commodities, and derivatives.Īs a result, PE firms have a long-term focus (often 3-5+ years for individual companies) and spend more time on operations and growth for their portfolio companies. They also charge a management fee on the total amount of capital raised.Īfter that, however, almost everything else is different. They attempt to earn a high return, and in exchange, they take a percentage of that return for their performance fee. Long-term careers – What are the trade-offs in terms of day-to-day work, advancement, and salaries, and will these industries be around for the next few decades?Īround 90% of the articles I found addressed point #1, often copying and pasting the same text, while completely ignoring points #2 and #3.īut we don’t use $5-per-hour writers in 3 rd world countries on this site, so I’m going to explain the differences and focus on hedge funds and private equity from a careers, compensation, promotion and exit opportunities perspective: Hedge Funds vs Private Equity: What Do They Do?īoth private equity (PE) firms and hedge funds (HFs) are classified as “alternative investments” and share some high-level similarities.įor example, they both raise capital from outside investors, called Limited Partners (LPs), and then invest that capital into companies or other assets.Exit opportunities – If you’re currently in investment banking, sales & trading, or equity research, which one is best for the next step in your career?.Investment vehicles – If you’re wealthy, should you invest in hedge funds or private equity funds? Also, how do they invest, and how do they charge fees?.Understand any limitations to time restrictions imposed to redeem shares.The “hedge fund vs private equity” question could refer to many things:.Understand how a fund's performance is determined and whether it reflects cash or assets received by the fund as opposed to the manager’s estimate of the change in the value. ![]() Understand how a fund’s assets are valued as hedge funds may invest in highly illiquid securities and valuations of fund assets will affect the fees that the manager charges.Evaluate potential conflicts of interest disclosed by hedge fund managers and research the background and reputation of the hedge fund managers.Determine if the fund is using leverage or speculative investment techniques which will typically invest both the investors’ capital and the borrowed money to make investments.Understand the level of risk involved in the fund’s investment strategies and that they equate with personal investing goals, time horizons, and risk tolerance. ![]() Read the hedge fund’s documents and agreements which contain information about investing in the fund, the strategies of the fund, the location of the fund, and the risks anticipated by the investment.
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