Hedge Fund is less regulated compared to other pooled investment AND
PE rely on manager’s business skills rather than his or her portfolio management skills, why?
Thank you!
Hedge funds are less regulated because they are offered mainly to accredited and institutional investors. i.e. Investors who are more sophisticated and do not need the same protections in place as the traditional everyday retail banking clients. As for PE, investments in private equity are often direct investments. Meaning that the general partner (PE manager) will invest in a company and be actively involved in the strategic and operational functions of the business. They often sit on the business’ board and provide expertise and guidance to the management team. PE firms often get a return on investment through an enhanced multiple (re-pricing, i.e. buying the business at a low P/E or EBITDA multiple and selling it at a higher multiple), de-leveraging the business overtime by improving its cash flow (since many PEs are based on leveraged buyouts), and improving the firms operations/capital structure. In conclusion, yeah… skill is required in PE. Because PE business is a hands on business, it’s direct investing. Just like direct investing in real estate, someone’s got to manage and up keep the building, haha.
Totally forgot that after all the other concepts I have been trying to remember.
Thanks again for all your help! I like the piece you mentioned about direct investing in real estate which helps me remember these even better.
lol I hear you, it’s hard to keep all the concepts in check. Actually the only reason I remember this so well is that I had a university professor who drove me insane while taking his private equity and venture capital class, but it all came in handy for the CFA, who would’ve thunk…
Just like Steve Jobs said “connect the dot.” Everything happens for a reason 