Anonymous asked in Social ScienceEconomics · 1 decade ago

what is Private Eqity and equity investments? Also what are Hedge Funds? Im in high school so please explain?

in a way that i can understand

1 Answer

  • 1 decade ago
    Best Answer

    Every company needs Capital. But Capital has a cost and it's not easy to find. So, what can this company do?

    1. Borrow from the bank. But this loan might not cover the needs of the firm (if the firm wants more money), or the cost of the loan might be too high, due to high interest, so company cannot afford it.

    2. Company can be listed in a stock market. By this, firm will have the money without any cost (since the investors would be stock owners, meaning that they have a percentage of the company). But firm might not have the listing requirements and standards Stock Exchange needs. Or, the owners of the firm might not want to give a percentage of their company to unknown investors for ever.

    3. Firm owners find a person or a group of private investors that have the needen amount of money. These investors are buying a percentage of the company, by purchasing stocks. After some time, after they would use the capital on efficient investments, and after comany's profit will be high enough, company's owners can buy-back their shares, so they can have back the whole company. Otherwise, these private investors can sell to another investorts their share, or they can try to list the company on a stock-exchange. These private investors are the Private Equity Fund.

    A hedge fund is (according to the Investopedia's definition an aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

    Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

    For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

    It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

    I hope this helps

Still have questions? Get your answers by asking now.