Private Equity vs Hedge Funds vs Venture Capital... How to tell them apart.

if by the end of this video you don't know how to explain private equity hedge funds and venture capital to a five-year-old then i failed my mission of making finance easy to understand what is going on youtube welcome back to the channel okay so today we're going to talk about private equity venture capital and hedge funds what exactly do they do how do they differ from each other so first and foremost let's start a few key distinctions that will make understanding them easy for you so when we think of hedge funds i want you to think of the trading floor of an investment bank because hedge funds are essentially trading on the flip side when you think of private equity and venture capital i want you not to think of trading but i want you to think of investing now what's the difference between investing and trading one big difference typically trading is oftentimes short-term and investing is long-term trading is liquid investing is illiquid liquid means you can access your money sooner illiquid means you are locking up your money or your invested capital for a longer period of time when you're at a hedge fund you're typically making investments or trading on an hourly daily a few days a few months few weeks etc basis when you're investing capital as a private equity firm or a venture capital firm you're locking that money up you're investing that money over a longer time horizon one year three years five years ten years plus and so initially or immediately you can see the key differences between hedge funds and private equity and venture capital is the time horizon of the investment activity but more on that later on what i want to start on specifically is private equity and then i'm going to touch on hedge funds and then i'm going to touch on venture capital so to begin private equity what is private equity when you hear the term private equity i want you immediately to break the term up so you've got private and you've got equity private means non-public right and equity is a piece of a company so private equity is essentially non-public pieces of companies so you've got companies who are public like mcdonald's apple coca-cola so on and so forth if we buy pieces of them that's public equity however private equity investing essentially just invest capital into private companies so you get large sums of money from investors whether it's insurance companies pension schemes large financial institutions private investors high net worth individuals they give all their money to a private equity firm now that private equity firm has this pool of money and they need to invest it so in private equity they start investing that money in the shares of a private company what's important to understand is in private equity you're investing in sizable companies so you're not investing in startups you're investing in companies that have been around for a while and you think as a private equity firm or investor you think that investing capital into these companies or this company can be useful because you can implement strategies in order to make the company perform better over the next few years five ten years two three years whatever it might be and then that company can be sold to an even bigger company for a profit as a private equity investor you're investing in companies hoping that those companies will increase in value over time whether you work on them or not when they get bought you make a hefty return on your investment and that profit goes to you as the private equity investor as well as the investors who chipped in at the beginning of that private equity fund that you were raising for so private equity essentially is investing money in companies which are private and already established in order to increase their value and then hopefully make a profit from their sale later on so next we've got hedge funds hedge funds you can think of them as financial institutions who are actively investing and trading in the financial markets hedge funds don't invest like private equity or venture capital firms in startups or established companies hedge funds instead they are investing in currencies they are investing in commodities they are investing across the financial markets when they are investing in equities most of it is public equities so publicly traded companies like apple coca-cola mcdonald's so on and so forth hedge funds are not investing over the long term they are similar to private equity and venture capital they're getting money from investors whether that's companies individuals so on and so forth and they get all this money and then they invest it into different parts of the financial markets hedge funds specialize so you might have a global macro hedge fund which only has a global macro strategy you might have an equity hedge fund which only focuses on publicly traded equity and so hedge funds are more kind of like a trader who is investing in the markets to make a quick profit and then look for the next opportunity whereas private equity investors are less like a day trader and more a long term investor but yeah that's the key distinction short term long term and the investment strategies that are in use so essentially if we break the term up hedge funds to hedge is to protect money and fund is a pool of money hedge funds get all this money from investors and investors into different financial strategies across the financial markets they make money by charging a fee on the money that they manage and also they take a cut of the profits that are received from their successful trades before we go on to venture capital i want to introduce today's video sponsor toggle now toggle is created by two ex-hedge fund employees and here's a little bit more about them poggle is a platform for both institutional and retail investors and it leverages ai artificial intelligence to help you get unique insights to allow you to invest better toggle helps active investors both professional and retail as 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capital money so you're investing in very early stage startups and companies so venture capital ticket sizes typically of the investments are anywhere from 250 500 000 up to 100 million dollars sometimes even larger private equity on the other hand 100 million dollars to over 500 million dollars a billion dollars plus so the sheer scale is completely different in venture capital compared to private equity venture capital private equity hedge funds hopefully those all make sense to you now and it's easy to always remember what they do you just break the terms up private equity private companies hedge funds protect money you invest that money to get return venture capital capital invested in startups and that's pretty much it it's very straightforward so the next time you hear the terms venture capital hedge funds or private equity don't let the jargon throw you off just break up the terms into simple words and it's very very easy to understand if you learn even one small thing in this video that you didn't know previously please smash the like button it helps the channel grow and if you made it this far in the video check out some of these videos on private equity and hedge funds and let me know what videos you want me to make next peace

Channel: Afzal Hussein

Views: 73,710

Keywords: Students, student, university, internship, intern, insight week, goldman sachs, jp morgan, investment banking, investment, banking, finance, careers, corporate ladder, how much do investment bankers earn, investment banking pay, investment banking salary, investment banking bonuses, investment banking internship, bonuses and salaries, money, afzal, afzal hussein, afzal hussein investment bank, hedge fund, hedge funds, private equity, venture capital, startups, startup, investing, financing

Id: w830AMVcrrk

Length: 8min 37sec (517 seconds)

Published: Thu Mar 31 2022