Private equity and hedge funds share many similarities — at least on the surface. The ultimate goal for both is to get as much of a return as possible on their initial investments. However, when you dig a little deeper, private equity and hedge funds vary considerably, and the financial professionals involved require different skill sets.
To fully understand the relationship between private equity and hedge funds, we'll first dive into what exactly hedge funds and private equity funds are. Then we’ll explore their key similarities and differences, as well as some notable examples.
A hedge fund is where institutional investors — high-net-worth individuals, financial institutions, or financial professionals — pool together a certain amount of capital with the goal of making a return on their investment in as short a time as possible. Because hedge funds are so focused on this solitary goal, the fund manager will choose any path possible to achieve a positive result for the investors, regardless of the current market situation.
What this also means is no two hedge funds are alike. Each invests in whatever the manager feels will return the most, so they tend to focus on high-risk, high-return investments. As such, they operate within both the public and private markets and can invest in stocks, bonds, commodities, currencies, and derivatives.
It is important to note that hedge funds can technically be private equity funds if they purchase controlling stakes in a private company — or acquire it entirely — though this is a rare occurrence.
Even though hedge fund managers will often follow their own instincts when it comes to investing the pooled capital of the fund, there are several consistent strategies that have emerged over the years.
As of 2023, SigTech estimated there were more than 30,000 hedge funds in existence. However, some hedge funds have made more of a name for themselves than others. For instance, Bridgewater Associates is currently the largest hedge fund with nearly $125 billion in assets under management (AUM). However, Citadel is the most profitable hedge fund of all time, having made $74 billion for its investors since its inception over 34 years ago.
Scion Capital (which is now known as Scion Asset Management), is another popular hedge fund run by the famous Michael Burry. He was one of a select group of people who recognized the 2008 housing bubble — and the resulting crash. That single event earned Burry $100 million and raked in $725 million for his investors.
A private equity fund is a pooled collection of capital raised from institutional investors to buy equity in a business — often a controlling portion if not the entire company — to influence that company's growth trajectory. Private equity funds are managed and partly owned by a private equity firm, known as a General Partner (GP), which is responsible for managing everything about the fund, including sourcing the investors.
While the fund is owned by both the investors, known as Limited Partners (LPs), and the firm, the fund itself often owns an entire portfolio of companies, and usually has heavy influence, if not direct control, over them. For a more in-depth look at a private equity fund's structure, including the parties involved, fees, and more, check out our PE fund structure blog post.
Now that you have the foundational information on PE vs. hedge funds, let's illustrate their differences and similarities.
At a simplistic level, PE and hedge funds are remarkably similar. Both are managed by external parties: Private equity funds are managed by private equity firms, and hedge funds are managed by a suite of hedge fund managers. Additionally, the fees the fund managers collect are often similar: Most charge about 2% in management fees as well as a 20% incentive fee based on the size of the fund's eventual profit.
On top of that, private equity and hedge funds both require considerable initial capital — $100,000 is a general minimum for investment — and each investor must be accredited. That said, funds are often quite a bit larger and can require each investor to provide millions in capital.
Ultimately, private equity and hedge funds differ in more ways than they are similar:
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In addition to the differences above, it's important to define the difference between private equity firms and hedge funds. While private equity firms do manage PE funds, firms may (and often do) have multiple PE funds that they manage, each with its own portfolio of private companies. Each of these PE funds will also have its own investment thesis to guide the GP's investment decisions.
Hedge funds, on the other hand, are much more flexible in their investing strategies. A hedge fund company often only has a single fund, and the managers use the openness of a hedge fund's investment and liquidity events to their advantage.
That said, the career path in private equity vs. hedge funds are similar, due largely to the required financial services background. PE and hedge fund professionals will often navigate the same path, starting at a junior analyst position and working their way up the ladder to eventually managing funds and making deals. However, the skills and knowledge gained along that path do not often overlap, and it's not common for professionals in one type of fund to be able to manage the other.
With all their similarities and differences, from the type of investments and how long they take to come to fruition to the career path and skills required to make money, neither private equity nor hedge funds would be possible without the right investment opportunity.
Regardless of whether you want to search for the perfect private company for your private equity fund to acquire, map a particular market to better understand its trajectory, or recognize trends to hedge a bet against, your path must start with using the right deal sourcing platform.
With hundreds of thousands of sources and millions of data points, Sourcescrub can help you find the perfect investment opportunity — before your competition snaps it up. See it in action for yourself by requesting a demo today.
