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I came across these two terms(Hedge Fund & Private Equity) while working on a finance issue and turned out these two are different terms and functional behavior is also different.

Can someone explain with example, what is the meaning of these terms and how these two are different from each other?

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Private Equity is simply some type of an investment company, which is owned in a way not accessible to the public. ie: Warren Buffet runs Berkshire Hatheway, which is an investment company which itself is traded on the New York Stock Exchange. This means that anyone can buy shares in the company, and own a small fraction of it. If Warren Buffet owned all the shares of Berkshire Hatheway, it would be a Private Equity company. Note that 'Equity' refers to the ownership of the company itself; a private investment company may simply buy Bonds (which are a form of Debt), in which case, they would not be technically considered a 'Private Equity' company.

A Hedge Fund is a very broad term which I don't believe has significant meaning. Technically, it means something along the lines of an investment fund (either public or private) which attempts to hedge the risks of its portfolio, by carefully considering what type of investments it purchased. This refers back to the meaning of 'hedge', ie: 'hedging your bets'. In my opinion, 'Hedge Fund' is not meaningfully different from 'investment fund' or other similar terms. It is just the most popular way to refer to this type of industry at the present time.

You can see the trend of using the term 'investment fund' vs 'hedge fund' using this link: https://trends.google.com/trends/explore?date=all&q=hedge%20fund,investment%20fund Note that the high-point of the use of 'hedge fund' occurred on October 2008, right at the peak of the global financial crisis. The term evokes a certain image of 'high finance' / 'wall-street types' that may exploit various situations (such as tax legislation, or 'secret information') for their own gain. Without a clear definition, however, it is a term without much meaning. If you do a similar comparison between 'hedge fund' and 'private equity', you can see that the two correlate very closely; I believe the term 'private equity' is similarly misused to generally refer to 'investment bankers'. However in that case, 'private equity' has a more clear definition on its own merits.

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  • To make a small addition, some private equity works as a pool of money raised by an investment firm for the purpose of buying privately held firms, growing them and then taking them public.
    – zeta-band
    Feb 15 '17 at 20:11
  • @zeta-band I am not familiar with that definition of the term. In my mind, if a public company buys equity of other companies, it is 'public equity'. If a private company buys equity of other companies, it is 'private equity'. In your example, if that 'investment firm' were privately owned, I would call it 'private equity'. To get more specific than that betrays the usefulness of the word; of course, this is the problem with fluid language over generally non-technical subjects: the meaning changes as the need for expressing new ideas changes.
    – Grade 'Eh' Bacon
    Feb 15 '17 at 20:15
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    There are publicly traded companies that raise money to invest in buying private companies. Blackstone Group (BX), Oaktree Capital Group (OAK) and American Capital (ACAS) are examples.
    – zeta-band
    Feb 15 '17 at 20:21
  • @zeta-band Right, just like Berkshire Hatheway that I mentioned in my example, the fact that these firms are publically owned would mean that they themselves are "public equity". A public equity firm could purchase a private company, but that private company, as an investment, is not itself 'private equity', unless it is in the business of, itself, investing in other businesses. An example of this would be if ABC ltd. is a privately owned investment firm which buys out other businesses, and Berkshire Hatheway bought out ABC ltd. After BH buys it, though, it becomes 'public equity'.
    – Grade 'Eh' Bacon
    Feb 15 '17 at 20:26

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