There are several ways investors can put their money into private and public markets to help generate profits. There are many investment instruments like hedge funds, private equity, growth equity, and mergers and acquisitions. These all offer a good way for a company to raise capital with the hope of generating profits in the end. We examine all of these funding instruments under the general theme of a hedge fund.
What are hedge funds?
Hedge funds are known as investment companies that specialize in investing money from clients in special alternative investments. They help their clients invest money so that they can guide against unforeseen changes or to make money in spite of unfavorable conditions. Hedge funds operate by collecting money from potential investors (with a promise if huge returns) and helping them invest in profitable ventures.
The Hedge funds are privately held funds and offer more risks and flexibility in comparison to mutual funds. Hedge funds operate in a largely unregulated market. This led to risky strategies from multiple hedge fund companies that eventually caused the global financial crisis in 2008. But, since then, steps have been taken by the right authorities to bring back the investment instrument to much safer and regulated operational procedures.
Hedge fund charges
Hedge funds usually charge their clients a percentage of the total money being invested by that client. This is how they make their money. They will usually charge every client, both management and performance fees. The fees are usually between 2% and 20% of the total capital (assets) being controlled by management.
The process of hedge funds
There is a process behind the way hedge funds work. They involve money pooled together by different investors for the purpose of making profits. The polled money is managed by the fund manager. The objective f the fund manager is to eliminate risk and maximize the returns of the pooled money. Hedge funds usually come with different structures. But they are all operated by managers. The managers invest the money into different assets to help achieve the goals of the funds.
How much is needed to invest in a hedge fund?
The minimum initial amount of money needed for people to put in a hedge fund is about $100,000. The maximum amount could be anything over $2 million. Hedge funds unlike stocks and bonds are not easily liquidated. Investors can only get out their money after their investment have spent a considerable amount of time.
How does private equity help investors?
Unlike hedge funds, private equity is a type of investment whereby, a private investor puts up the capital or money to invest in a business. Private equity investments usually involves investing into existing and mature businesses in established industries. Rather than get more profit at the end of a tenure, a private equity investment gives the investor a part ownership (often in percentage) of the company.
Private equity is usually done in private markets where investor’s money are safeguarded by investing in strong and established ventures. While hedge funds operate mainly in public markets. A private equity firm usually oversees private equity investments. They will put money into a company just to enhance the value of the company with time. They will then sell off the company to make a profit.
For a private equity firm to invest money into a company, they will usually get pool of investment capital to establish a fund. Soon as they get the amount of money they need, the fund is closed and invested in profitable businesses. Private equity firms are similar to hedge funds since they also make their money through management and performance fees which uses the 2 and 20 fee rule structure.
Growth equity for investors
Growth equity is another option for investors to pout their money in the private market. Also called expansion capital or growth capital, is a business investment opportunity where investors finance amature business that is undergoing a transformational expansion. Growth equity is usually administered by a growth equity investment firm and it is done in the hope that the business will yield dramatic profits as measured by the degree of its expansion.
How does mergers and acquisitions help investors
Mergers and Acquisitions unlike investing in hedge funds usually involve two companies or businesses. Mergers will usually happen when more than one companies come together to form a new and joint company. In contrast, an acquisition is used to describe a takeover of a business by another one. Mergers and Acquisitions (M&A) usually leverage on the synergy of two or more companies to generate more business opportunities and possibilities that would have been impossible with the individual companies.
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