HEDGE FUND VS. PRIVATE EQUITY FUND | WHAT´S THE DIFFERENCE?

What is a Hedge fund?

A Hedge fund is an open-end fund, where the fund manager, typically the Fund Manager, pools together the money invested in the fund by all the investors and uses that money to make investments on behalf of the fund.

Do hedge funds outperform private equity?

This depends on the investment thesis and the quality of the investments. If your company has shares for sale in a public market, then you may want to look for a hedge fund. If, on the other hand, your company does not have shares for sale in public markets, then you should consider contacting a private equity fund.

Private equity vs hedge fund: Top 10 differences

2. Company Stage

Hedge funds typically invest in mature, later stage companies that are publicly traded. On the other hand, Private Equity funds typically invest in less mature companies, and if they do invest in publicly traded companies, it is with the intent to take a company private (i.e. delist the company from a publicly traded exchange). Going private has two very distinct advantages: it eliminates the public compliance disclosures and the associated compliance costs. As such, private companies can focus on strategy and execution that are much longer term in nature without having to worry about retail investors.

3. Investment Horizon

Hedge funds primarily invest in liquid assets. The investors in a Hedge fund can typically cash out their investments in the fund at any time. The typical length of a Hedge fund is between 3 and 5 years whereas a typical PE fund is 10+ years. As such, investors in a PE fund are required to commit their funds for a minimum period of time, usually at least 5 years, and often 7 to 10+ years.

As we discussed in the Family Office vs. Hedge Fund article, Hedge Funds  have a short-term investment horizon focused on maximizing returns.

4. Investment Risk

Hedge funds tend to involve a higher level of risk than private equity, that use more conservative strategies (as is the case with Family Offices). This is because they seek to obtain the highest amount of return on investment in a short period of time.

5. Investment Structure and Capital Contributions

Most Hedge funds are open-ended, so investors can come into the fund at any time. However, hedge fund investors can only add funds once. On the other hand, PE funds do not allow adding money after a certain period of time but private equity fund investors are free to add more funds, if necessary.

6. Liquidity and Lock-up Period

Investors in a Hedge fund can withdraw their money once the lock-up period has lapsed. 

Both types of funds have a lock-up period, where the money cannot be removed from the fund. The typical lock-up period for a Hedge fund is between 6 months and 1 year to allow for the invested capital to be properly deployed. The typical lock-up period for a PE fund is between 5 and 7 years. Thus, PE funds have less liquidity than Hedge funds.  The longer the defined length (in the fund formation documents), the longer the lock-up period. This is because a private equity investment is less liquid and needs time for the company being invested in to turn around.

7. Control

A Hedge fund typically does not have control nor influence over the companies in which they invest. On the other hand, PE funds control 50% or more of the equity and the voting rights. As such, they control the direction of the company.

8. Investors and Level of Participation

While the investors in both PE and Hedge funds could be the same, Hedge fund investors are typically institutions rather than individual accredited investors.



While PE funds require active investor participation, hedge funds require passive investor participation. This is because in hedge funds, private investment companies raise funds from investors, to reinvest in other companies.

9. Taxes

Unlike Hedge funds, where profits are subject to taxes, in private funds, profits do not depend on the amount of taxes paid

10. Funds life

Private equity investment funds have a contractually defined life. On the other hand, hedge funds do not have a limitation for the life of the funds. 

Which is riskier: Private Equity or Hedge Fund?

It depends on so many factors that it is impossible to say without generalization. Hedge funds have a shorter term investment horizon and lack control over the investments. This makes it harder to influence the investment return. 

What is better: Hedge funds or Private Equity?

It depends on your company's situation and maturity, you may be more inclined to contact one or another type of fund. For example, if your company is on the public market, and you want to maintain majority control over your company, then a Hedge fund makes more sense.

However, if your company is not listed on a public market and it operates in a fragmented market where there is no defacto incumbent, then teaming up with a PE firm to execute a roll-up strategy and consolidate the market would make a lot of sense.

Final Thoughts

The world of entrepreneurship and the path to scale are difficult and encumbered with challenges. Depending on your goals for the company and the maturity of the company, taking on an outside investment may be the catalyst that you need to take your company to the next level. Both PE and Hedge funds play an important role in the investment capital ecosystem but their suitability to potential investee companies is highly company and fund specific. 

Clarity of the North Star for your company and doing your due diligence over potential investors are key to your company’s long-term success. Focus on creating a near perfect alignment between what you need to accomplish and what the investor needs to accomplish. Otherwise, headaches and disagreements are bound to arise.