How is Hedge Fund Different from Venture Capital

1. How is Hedge Fund Different from Venture Capital? For finance nerds, hedge funds are not unknown terms, but not a lot of us understand the strategies, techniques, and workings that back the phenomenon called hedge fund. To put it simply, hedge funds are investment portfolios that are put together for investors who have the net worth of one million dollars or more. The goal of everybody involved in this process is to incur profit and maximize the return. To ensure that the money is invested smartly, so as to get more profit in return, these are backed by careful analysis and advanced strategies. These investment portfolios are managed and studied by professionals who are affiliated to organisations that provide financial advisory services. Since, hedge funds are directed towards creating a diverse investment portfolio, these professionals invest across various asset classes or categories. However, this is not the only investment option that is available. Financial advisors also specialise in venture capital. Even though the end goal of both these investment routes are same in the sense that it is oriented towards maximizing returns, but the investment technique slightly differs. Unlike hedge funds, which are invested across various asset categories in the market, venture capitalists specialise in providing capital to businesses that are new or start- ups. Therefore, the risk is far more in the venture capital model as the return is largely incumbent on how much profit does the company make. Given that what is being invested in differs when it comes to hedge fund and venture capital, the strategies that are applied to ensure that profit is derived also differ and are highly specialised. Hedge funds are invested in illiquid securities; therefore, the duration can span across years. However, an investor is required to keep the investment in the fund for at least a year if not more. Most investors usually prefer to keep their funds for a short duration in order to get quick profit. Unlike hedge funds that can be liquidated after just a year, venture capital investments are made keeping in mind a long-term equity stake in a particular company, as their investments are more likely to mature and perform well in a couple of years. Most likely, venture captialists invest in an entrepreneurial dream keeping an exit-strategy ready in their mind. www.avendus.com

2. Since hedge-funds are oriented towards getting maximum profits in a rather short time, in comparison to other investment models like mutual funds, they are also less regulated and are costlier. Hedge funds not only charge expense ratio, but also a performance fee keeping in mind the high-risk scenario. Unlike hedge funds, venture capital is largely dependent on how well the company they have invested in performs. It is as important to manage to the company’s functioning well, as it is to manage their investments, to ensure that they get maximum profits in return. To achieve high returns, in addition to having a fund manager, they also have a team of corporate experts to specially manage the companies that have been acquired. www.avendus.com