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Online Investors’ Ten Most Common Questions

How are hedge funds, private equity funds, and venture capital funds different?

Hedge funds: Pools of money collected by largely unregulated investment managers who aim to get returns that beat the stock market. Unlike mutual fund managers who generally invest in stocks and bonds, hedge fund managers are free to invest in just about any asset they choose. This freedom to freely invest with little regulatory oversight is supposed to let hedge funds make money even when stocks are falling.

Private-equity funds: Leveraged-buyout firms use money from large investors like pension plans to buy public and private companies. These firms, also called private-equity firms, generally borrow money so that they can afford to buy big companies. Investment funds run by private-equity firms usually have a different strategy than hedge funds do.

Private-equity firms generally try to run the companies they bought for a short time, fix them, and sell them for a profit. Private-equity firms generally have a stable of experienced businesspeople they can call in to run companies.

Venture capital: If you’ve ever wondered how young companies can afford to launch new high-tech products, it’s probably thanks to venture capital firms. These firms make relatively small investments in scores of highly risky and immature companies. Most of the investments go up in smoke as the fledgling companies fail to get off the ground. But when venture capital firms hit a Google or Microsoft, they can make big bucks.

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