Hedge Funds and Private Equity Funds: Short-term vs. Long-term Profits

Funds and InvestmentIn the world of investment, you’ll always hear two things when it comes to high-stakes investments: Hedge Funds and Private Equity Funds. These are two very similar types of funds with equally similar investors, and for the uninitiated, these can almost seem interchangeable.

But, there are differences between them that you should know. Although both have similar practices and methods, their goals are very different from one another.

Short-term and High Risk

A hedge fund’s goal is to get the highest investment returns as fast as possible. Unlike private equity funds, these focus on maximizing short-term profits through liquid assets. These can literally be anything from bonds, derivatives, futures, and even currencies. Both funds have a certain amount of risk, but being part of a hedge fund means you have to accept a higher level of risk due to its short-term and fast-paced approach when it comes to investment. On the other hand, since hedge funds prefer liquid assets, investors like you can cash out your investments in the fund at any given time.

Long-term direct investment

Capital Fund Law Group notes that “a private equity fund encompasses unique securities, regulatory, and tax issues.” Compared to hedge funds, investors in private equity funds look at the long-term profits and potential of an investment. Direct investment is the game here, and you will typically invest directly in companies or stock purchases. The private equity fund’s next goal is actually improving the company, through changing the management, smoothing out the operations, and even expanding the business itself.

Private equity funds require more commitment than hedge funds, usually with a seven- to 10-year commitment of the funds as a minimum time period. The goal here is to eventually sell the company that you acquire for a profit, either through a public offering the stock market or privately between investors or a another private equity group.

Before you start investing in either a hedge fund or a private equity fund, it is important to determine whether you have a long-term goal or a short-term one when it comes to investments. The two may seem similar, but the ultimate goals are drastically different and you need to determine the right one that will help you achieve your own goal successfully.

Posted on by Linda Knight in Digi-Serve

About Linda Knight

Linda is a professor of political science courses. She wrote a book on economics and politics when she was taking her master's degree. She also loves to read the works of famous authors like George Orwell and uses them as inspiration. Linda currently lives with her family in Pennsylvania.

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