Finance and investments are two of the most luring and intimidating components of our economy. Though often involving unfamiliar terms, phrases, and math, the concepts of these industries can be understood to help investors optimize the returns on their investments. Luckily for investors looking to participate in investments without first developing a proficiency in investing fundamentals, there are hedge funds and private equity funds. These fund structures alleviate the pressure associated with investment decisions by allowing investors to place their investment capital in a managed fund. While hedge funds and private equity funds remove much of the burden concerning market research and analysis, investors should understand the key distinctions between these two funds to gain a foundational understanding of the investment opportunities.
Generally, hedge funds invest in readily tradable securities, such as bonds, commodities, stocks, and options. The assets in hedge funds’ portfolios are typically very liquid, meaning they can be purchased and sold quickly. This allows hedge funds to frequently evaluate and quickly modify their strategy, when necessary, which gives hedge funds the advantage of being agile in the marketplace.
In contrast, private equity funds often invest in companies and properties, with the goal of managing, developing, and selling these assets. Unlike hedge funds, private equity funds investment strategies can take years to mature and require long term planning and patience.
Hedge funds typically accept investors on a continual basis, usually until the fund reaches 100 investors, or the fund’s general partner decides to stop accepting new investors. Additionally, hedge funds are often perpetual in nature and do not have a date of termination. Hedge fund investors are generally required to lock-up their investment for a period of one year and are allowed to redeem their investment 30-90 days following the anniversary of the investment.
Private equity funds typically have a predetermined amount of capital needed for their investments, usually between $25 million to $100 million, and may spend years raising this capital and can involve many investment subscriptions. Further, private equity funds often have a set duration to realize their investment, most commonly between 5 to 10 years.
Distributions to Investors
Investors in hedge funds typically do not redeem their investment until they withdraw from the fund. However, some hedge funds may be structured to provide investors with regular income and will make distributions to investors on determined intervals. In addition to the investors’ distributions, the general partner of the fund will often receive an allocation based on the performance of the fund, usually following the close of a month, quarter, or year.
Alternatively, private equity funds make distributions following the liquidation of an asset or another determined interval. In some private equity funds, investors may receive a “preferred return” that pays the investors firsts, then splits the profits between the investors and the general partner.
Participating in hedge funds or private equity funds can allow investors to receive the benefits of investing, without the burden of becoming a master of the market. Knowing the characteristics and opportunities each of these funds provide can help investors make decisions that best serve their future.
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