How Private Equity, Hedge Funds and Venture Capital Differ, From Strategy to Fees

Private equity buys companies, hedge funds trade markets, and venture capital backs startups. All three are private investment funds run by professional managers, but they invest in different things, make money in different ways, and tie up investors’ money for very different lengths of time.

The three are often lumped together as “alternative investments,” and the overlap in fees and investor rules makes them easy to confuse. Once you see what each one actually owns, the differences become clear.

This guide compares them side by side: what each invests in, how each makes money, how long your money is locked up, how the fees work, the risks, the regulation, and who is allowed to invest. FRC has no relationship with any fund or firm mentioned and earns no commission from any investment.

Prefer to watch? FRC’s video comparing private equity, hedge funds and venture capital covers the essentials in about five minutes, and it sits within our fact-checked explainer playlist on YouTube.

The One-Line Difference

If you remember one thing, remember this. A private equity fund buys established companies and works to make them more valuable. A hedge fund buys and sells securities in public markets, aiming to profit whether prices rise or fall. A venture capital fund invests in young startups, hoping a few will grow into very large companies.

Everything else, from how long your money is tied up to how the managers are paid, follows from those different strategies. A fund that owns whole companies cannot sell them overnight, while a fund that trades listed shares can.

What the SIE and Series 65 Expect You to Know

Alternative investments, accredited investor rules and the regulation of fund managers all appear on the SIE and the Series 65. Candidates are expected to know how these funds are structured, who can invest in them, and what risks they carry for clients.

FRC’s SIE Examination Preparation course covers investment products and the investor protections around them, and the SIE can be taken before you are hired. The Series 65 Exam Preparation course goes deeper into investment vehicles, fees, suitability and adviser regulation, and it requires no sponsor.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to put your exam off. There is a further benefit too: since 2020, holders of the Series 7, Series 65 or Series 82 in good standing qualify as accredited investors, which opens the door to the funds this guide describes.

Private Equity: Buying Companies

A private equity firm raises a fund from investors and uses it to buy mature companies, usually taking full control. It often uses a leveraged buyout, funding much of the purchase with debt that the company itself must repay.

The firm then works to grow the company’s earnings, improve how it operates, pay down that debt and eventually sell the business for more than it paid, typically after several years. Blackstone, KKR and Apollo are among the largest names in the industry.

Returns come from three sources: earnings growth, debt paydown and selling at a higher valuation than the purchase price. For a full explanation of how buyouts work, read FRC’s guide to how private equity actually works.

Hedge Funds: Trading Markets

A hedge fund does not usually buy whole companies. It trades in public markets, including stocks, bonds, currencies, commodities and derivatives, and its holdings can change daily.

Many hedge funds can profit from prices falling as well as rising, through short selling, where the fund borrows a security, sells it and aims to buy it back later at a lower price. Many also use leverage, borrowing money or using derivatives to magnify their positions.

Strategies vary enormously. Long-short equity funds buy shares they expect to rise and short those they expect to fall. Global macro funds trade on interest rates, currencies and economic trends, event-driven funds trade around mergers and restructurings, and quantitative funds use computer models to find patterns in market data.

Venture Capital: Backing Startups

A venture capital fund invests in young, fast-growing companies, usually taking a minority stake rather than control, and rarely using debt. The startups it backs are often years away from making a profit.

Funding comes in rounds as a company grows. Early seed funding helps a startup build its first product, and later rounds, labeled Series A, Series B and beyond, fund its expansion, typically at rising valuations if the business is succeeding.

Most startups fail or return little, so a venture fund depends on a small number of huge winners. One company that goes public or is bought for billions can make up for many losses, which is why venture investors look for businesses that could grow very large, not just steadily.

How Each One Makes Money for Investors

Private equity aims to turn a company’s growth and debt paydown into a profit when the business is sold. The cash comes back to investors in lumps, as each company in the fund is exited.

Hedge funds aim to produce returns from trading, often with less dependence on the overall direction of the stock market. Gains and losses show up continuously in the fund’s value, which is calculated regularly, often monthly.

Venture capital aims for a small number of very large exits through an IPO or a sale to a larger company. Returns are often slow to appear, because successful startups can take many years to reach an exit, and early losses from failed companies tend to show up first.

The Same $10 Million, Three Ways

Imagine each type of fund has $10 million to invest. A private equity fund might put it, alongside borrowed money, into buying one established manufacturing business outright, then spend five years expanding its product range and cutting costs before selling it to a larger competitor.

A hedge fund might spread the same $10 million across dozens of positions, buying the shares of companies it expects to beat expectations and short selling those it expects to disappoint. It could adjust those positions every day as prices and news change.

A venture capital fund might split the money into small stakes in ten young startups. If seven fail, two return their money and one grows into a company worth billions, that single winner can still deliver a strong return for the whole fund.

How Long Your Money Is Tied Up

Private equity and venture capital funds typically run for about ten years, often with options to extend. Investors commit capital at the start, the manager calls it in as deals are found, and money is returned as investments are sold, so investors are usually locked in for most of the fund’s life.

Hedge funds are far more liquid. Investors can often withdraw money monthly or quarterly, although many funds impose an initial lock-up period, require advance notice of withdrawals, and can limit redemptions, known as gating, when too many investors want out at once.

That difference follows directly from what each fund owns. A hedge fund holding listed securities can sell them to meet withdrawals, while a private equity or venture fund holding private companies cannot.

How Capital Calls and Commitments Work

In private equity and venture capital, investors do not hand over all their money on day one. They make a commitment, a promise to provide a set amount, and the manager draws it down through capital calls as it finds companies to invest in.

That means an investor must keep cash available for several years to meet those calls. Missing a capital call can carry serious penalties under the fund’s terms, including losing part of the investment already made.

Hedge funds usually work differently. Investors subscribe a set amount, which is invested straight away, and the value of their holding moves with the fund’s performance from that point.

How the Fees Work

All three have traditionally used a version of “two and twenty”: a management fee of around 2% a year on the money committed or managed, plus a performance fee, known as carried interest in private equity and venture capital, of around 20% of the profits.

Hedge funds usually apply a high-water mark, which means the manager earns a performance fee only on new gains, after making up any earlier losses. Private equity funds often include a hurdle rate, a minimum return investors must receive before the manager shares in the profits.

Actual terms vary widely from fund to fund, and many funds charge less than the traditional figures, particularly to larger investors who can negotiate. Always read the fund’s offering documents to see exactly what you would pay.

The Risks Compared

Private equity’s main risks are leverage and illiquidity. Companies bought with significant debt can struggle if earnings fall or interest rates rise, and investors cannot easily exit before the fund sells its holdings.

A hedge fund’s risk depends on its strategy. Leverage and short positions can lead to sharp losses, and a short position can in theory lose more than the amount invested, because there is no limit to how high a price can rise.

Venture capital carries the highest failure rate of the three, because most young companies never succeed. Returns are also concentrated, so missing out on the few big winners can leave a fund with poor results overall.

How Each One Is Valued

Hedge funds that hold listed securities can value most of their holdings using market prices, so their reported value reflects what those securities would sell for today.

Private equity and venture capital funds own private companies with no daily market price. Their managers estimate values, usually each quarter, using methods such as comparisons with similar listed companies, recent transactions and the price of the latest funding round.

Those estimates can lag what the companies would actually fetch in a sale. That makes private fund returns look smoother than listed markets, but smoother is not the same as safer.

How They Are Regulated

All three are regulated, although their funds are generally private. Most rely on exemptions from registering under the Investment Company Act of 1940, such as limiting the number of investors or accepting only qualified purchasers, which for an individual means owning at least $5 million in investments.

Their managers generally register with the SEC or the states as investment advisers under the Investment Advisers Act of 1940, unless they qualify for an exemption. Advisers that manage only venture capital funds have their own exemption, as do advisers managing less than $150 million in private fund assets in the United States, though both must still file certain reports with the SEC.

Larger registered advisers to private funds also file Form PF, a confidential report that gives regulators data on their funds’ size, leverage and risk. The rules are designed to protect investors and help regulators monitor risks to the wider financial system.

Who Can Invest

Most private equity, hedge fund and venture capital funds are open only to accredited investors. Under the SEC’s definition, an individual generally qualifies with a net worth over $1 million, not counting their primary home, or income over $200,000 a year, or $300,000 together with a spouse or partner, in each of the last two years.

Since 2020, holders of the Series 7, Series 65 or Series 82 licenses in good standing also qualify, regardless of wealth. Many funds also set high minimum investments, often far beyond what most individuals could put into a single fund.

These restrictions exist because the funds are complex, illiquid and carry high risks, and they publish far less information than public companies or registered funds.

Routes In for Everyone Else

There are other ways in for investors who do not qualify. Listed private equity firms such as Blackstone, KKR and Apollo trade on the stock market, and some registered funds offer private equity exposure with lower minimums. FRC’s guide to how to invest in private equity funds explains each route.

For hedge fund-style strategies, some registered mutual funds and ETFs use techniques such as long-short investing, under the investor protections that come with registration. Their fees and liquidity differ from those of private hedge funds.

For startups, regulated equity crowdfunding under the SEC’s Regulation Crowdfunding allows non-accredited investors to invest small amounts through registered platforms, with annual limits based on income and net worth. The risks of startup investing still apply in full.

The Careers Behind Each One

The three industries also offer very different careers. Private equity professionals find, analyze and buy companies, then work with them to increase their value, which rewards financial modeling and deal experience.

Hedge fund analysts and portfolio managers research securities and markets and make trading decisions, often under daily pressure. Venture capital investors spend much of their time meeting founders, assessing new technologies and markets, and supporting the startups they back.

All three are intensely competitive to enter. FRC’s guide to how to get into private equity explains the main routes in, the licenses involved and what interviews test.

Show Employers What You Know

In industries this competitive, candidates need more than a list of claims on a resume. FRC’s Professional Membership gives you a verified Digital Profile, reached through a QR code on your resume, showing your credentials, your exam progress and a short Video Resume in your own voice.

That works for both sides. You show an employer who you are and what you have already achieved, and the employer gets a faster, clearer picture of every candidate, with less time spent checking qualifications.

Common Questions

What is the main difference between private equity and hedge funds? Private equity buys whole companies and holds them for several years, while hedge funds trade securities in public markets and can change their holdings daily. That makes hedge funds far more liquid for investors.

What is the difference between private equity and venture capital? Private equity usually buys control of mature companies, often using debt. Venture capital takes minority stakes in young startups, rarely uses debt, and relies on a few large winners to offset many failures.

Which is riskier: private equity, hedge funds or venture capital? Venture capital has the highest failure rate, because most startups never succeed. Hedge fund risk depends on strategy and leverage, and private equity’s main risks are leverage and illiquidity.

Can ordinary investors invest in hedge funds or venture capital? Most private funds are limited to accredited investors. Others can gain related exposure through registered funds that use hedge fund-style strategies, listed private equity firms, or regulated equity crowdfunding for startups.

Do all three charge “two and twenty”? All three have traditionally used a fee of around 2% a year plus around 20% of profits, but actual terms vary widely and many funds charge less.

Your Next Step

Private equity buys companies. Hedge funds trade markets. Venture capital backs startups. Each one suits different goals, carries different risks and locks up money for different lengths of time.

Before you invest in any of them, know what the fund owns, how and when you can get your money back, what every layer of fees costs, and whether you can afford to lose what you put in.