Hedge fund vs private equity: Know the risk involved, investment limit, fund structure and valuation

Both hedge funds and private equity are classified under alternative investments by SEBI. However, there are many differences between the two. The article focuses on the differences and how an investor can decide which one to choose.

Hedge funds vs private equity Which one to choose

Till a few years ago, one had to choose between traditional physical assets and financial assets while making investments. The traditional favourites in physical assets included gold, jewellery, and real estate. Financial assets included mutual funds, commodities, fixed income securities, digital gold, etc.

But the last few years have seen the evolution of an alternative investment category. Investments in this category include private equity, hedge funds, angel investing, peer-to-peer lending (P2P), art, collectables, etc. This piece will focus on hedge funds and private equity and highlight the key differences between them.

What is a hedge fund?

SEBI has categorised hedge fund investments under Category III Alternative Investment Fund. As per SEBI guidelines, a hedge fund uses diverse or complex trading strategies. It invests and trades in various securities having diverse risks or complex products, including listed and unlisted derivatives.

So, a hedge fund is a high-risk investment with a potential for high returns. The investment tenure is usually short, to take advantage of any market opportunities for a quick profit.

Also Read: Simple Ways In Which You Can Diversify Your Financial Portfolio

What is private equity?

SEBI has categorised private equity under Category II Alternative Investment Fund. As per SEBI guidelines, a private equity fund invests primarily in equity or equity-linked instruments or partnership interests of investee companies according to the fund's stated objective.

Private equity firms usually make long-term investments in companies either at an early stage or later. They usually stay invested till the business theme plays out, resulting in handsome gains at the time of exit.

Both hedge funds and private equity funds can raise money from any investor (Indian, foreign, or NRI) by issuing units to them. Each fund should have a corpus of at least Rs 20 crore, and the minimum investment from every investor should be Rs 1 crore.

Now that we understand what hedge funds and private equity are, let us understand the difference between hedge funds and private equity.

Also Read: Equity Mutual Funds Vs Stocks: Where To Invest?

Hedge fund vs private equity

The key differences between a hedge fund and private equity are listed below:



Also Read: Risks You must Watch Out For While Investing


Choosing between a hedge fund and private equity will depend on factors such as your risk profile, investment time horizon, etc. Private equity and hedge funds both come with high risk. If you have an aggressive risk profile and want to invest for the short term, choose a hedge fund; or else, you may go for a private equity fund.


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