Hedge Fund vs. Private Equity: What’s the Difference?

The main difference between a hedge fund vs. private equity firm is the types of investments they make. Private equity firms typically invest in private companies and see returns on investment by improving the company’s profits. On the other hand, hedge funds use complex investing techniques, like hedging and leveraging, to see returns on investments in the market via securities like stocks, options, and futures. 

What Is a Hedge Fund?

A hedge fund is a pool of money from private investors. Portfolio managers (also called fund managers) invest this money to generate returns for investors. Not just anyone can invest in a hedge fund, though. Only investors who have approval from the U.S. Securities and Exchange Commission (SEC) can invest, and they usually need to put a lot of money into the fund to qualify. 

Hedge funds “hedge” their investments the same way someone might hedge a bet — the fund invests in both directions, so no matter the outcome, there isn’t a complete loss. These funds also use alternative investment strategies like leveraging. Leveraging involves selling shares of a stock and then repurchasing it at a lower price. 

“This hedging strategy, with the use of leverage, protects a portfolio from sharp swings in market prices, known as volatility,” says Joseph Gradante, CEO of Allio Finance and a former hedge fund strategist.

One key difference between hedge funds and other investment methods is how they measure success. For many investment funds, a fiscal year is a success if the portfolio performs better than the S&P 500, even if there’s a net loss of money. However, hedge funds measure success by the fund’s bottom line. 

“The focus of hedge fund managers is to optimize the increase in investment value per year rather than perform better than the average,” says Gradante.

Another distinguishing factor between hedge funds and other investment funds, like private equity firms, is the liquidity of the investments — private equity firms usually perform long-term investments, and it may take years for investors to see returns. In contrast, investors in hedge funds can typically invest and withdraw money regularly. 

Types of Roles in Hedge Funds

Hedge funds utilize complex trading and investing methods. Some of the professionals who help these funds deliver returns to investors include: 

• Quantitative analysts
• Financial analysts
• Investment and portfolio managers
• Accountants
• Risk managers
• Securities traders

What Is a Private Equity Firm?

Private equity (PE) firms invest in privately held companies not traded on public stock exchanges. These are long-term investments, so investors may not see returns for years. 

Many private equity firms use a buy-out strategy, wherein they buy companies entirely or buy such a large number of shares in the company that they gain a majority stake. By buying out a company or taking a majority stake, the firm can control the company’s decision-making. Private equity firms use this decision-making power to restructure the company and increase profitability so their investment can pay off. 

“Other types of PE firms include venture capital, real estate funds, private credit, and infrastructure funds,” says Ambarish Srivastava, associate director of private equity and consulting at Acuity Knowledge Partners.

>>MORE: Explore the differences between private equity and venture capital.

Like hedge funds, the money in PE can come from private investors and high-net-worth individuals. Private equity firms also receive money from endowments and some unexpected investors, like pension funds.

Types of Roles in Private Equity Firms

To source companies and manage investments, private equity firms need professionals like: 

• Financial analysts
• Quantitative analysts
• Investment managers
• Venture capitalists 
• Accountants
• Business analysts 

However, most of these roles are separated into levels. PE firms have similar career trajectories as investment banking roles: analysts eventually become associates, then get promoted to vice president (VP) and manager roles, with the ultimate goal of becoming a partner of the firm someday. 

For everyone in private equity, Srivastava says the “day starts with updating themselves with the latest in the economic and investing world, with a keen focus on interest rates and spreads of key assets and markets.”

>>MORE: Learn the subtle differences between private equity and investment banking. 

Salaries in Private Equity vs. Hedge Funds

According to the U.S. Bureau of Labor Statistics, financial and investment analysts make an average base salary of $112,950 per year. However, financial analysts work in many roles across the financial services industry, not just private equity firms or hedge funds. 

Analysts often receive other forms of compensation beyond base salary, such as commission and performance bonuses. Based on estimates from Glassdoor, private equity analysts have an average total annual salary range of $135,000 to $252,000, while hedge fund analysts make around $108,000 to $195,000 per year. 

Additionally, the pay for professionals in hedge funds and private equity may depend on how successfully their actions generate returns for investors and the fund.   

In fact, Gradante says, “Hedge fund managers receive most of their compensation based on how much they increase their clients’ wealth.”

How to Get Into a Hedge Fund vs. Private Equity

Whether your goal is to work in private equity or a hedge fund, you typically need a relevant degree and demonstrable hard skills to get started. Certifications can also make you more marketable to employers. 

Education and Background

Private equity firms and hedge funds are competitive environments, and they often source talent from top universities. You need at least a bachelor’s degree, but many firms prefer candidates with a Master of Business Administration (MBA) or other master’s degrees. Studying finance, business, or economics is a great way to build the foundational knowledge necessary for these careers. 

Beyond education, your experiences matter. Completing an internship at a PE firm or investment bank, working with investments, or having a solid background in business can help set you apart from other candidates. The finance industry relies on relationships, so you must also network effectively. 

“The most important thing is professionally networking and showing a history of successfully navigating markets with real capital,” says Gradante.

>>MORE: Studying finance? Check out the top jobs for finance majors in 2024.

Certifications

Professional certifications show potential employers that you have specialized skills and knowledge. Some common certification options for those interested in pursuing a career in hedge funds or private equity include: 

• Chartered Financial Analyst (CFA): The CFA designation is one of the most respected certifications in the finance industry. It shows high-level finance and analytics skills and a deep understanding of investment management and risk analysis. 
• Chartered Alternative Investment Analyst (CAIA): The CAIA shows employers you have specialized skills in navigating various types of alternative investments. 
• Certified Investment Management Analyst (CIMA): The CIMA displays expertise in everything related to investment management, including performance measurement, risk assessment, and asset allocation. 
• Certified Public Accountant CPA): Understanding how to review a company’s finances and report information accurately is vital for many analysts, especially in private equity. 
• Financial Risk Manager (FRM): Private equity and hedge funds involve a lot of risk, and financial risk managers are experts at analyzing potential risks and planning ways to mitigate them. 

>>MORE: See the difference between CFAs vs. CPAs.

Skills

Professionals in private equity firms and hedge funds need impeccable analytical skills. PE analysts must be able to analyze companies and determine the right course of action, while those in hedge funds need to analyze market data and perform complex trades. 

Other skills required in private equity include:

• Experience or knowledge in a specific industry (real estate, startups, health care, etc.)
• Financial modeling
• Business acumen
• Research
• Excel
• Comparable company analysis 
• Communication
• Networking
• Attention to detail
• Collaboration

On the other hand, hedge fund professionals need skills like: 

• Deep knowledge of financial markets 
• Technical analysis
• Quantitative research
• Financial modeling
• Excel
• Communication
• Time management
• Consistency
• Decision-making 

According to Gradante, a core skill in hedge funds is understanding that investing is both a science and an art: “Hedge fund managers know that markets are based on history, monetary policy, and, most importantly, psychology (behavioral finance). Proving to them that you understand where science meets art in capital markets is how you’ll secure the opportunity.”

Bottom Line: What’s the Difference?

Private equity firms and hedge funds involve strategic investing to generate profits for investors and the fund itself. However, private equity firms invest in private companies, while hedge funds use stock markets to achieve profits. Investments made by hedge funds are short-term, meaning investors can see returns quickly. On the other hand, private equity firms often make long-term investments, and investors may wait years before seeing returns. 

The paths into private equity vs. hedge funds are similar — a degree in finance or a related field and internship experience in investing or business. However, analysts in private equity need to understand business inside and out, while those in hedge funds need to be able to read the market and predict its activity.

	Private Equity	Hedge Fund
Primary Function	Source private companies to invest in or buyout with hopes of seeing returns through the success or sale of the company.	Use alternative investment strategies, such as hedging and leveraging, to see year-over-year profit gains.
Average Analyst Salary	$135,000 to $252,000	$108,000 to $195,000
Education	Bachelor’s in finance, economics, or business.	Bachelor’s in finance, economics, or business. MBA preferred.
Key Skill	Specialized knowledge in an area the firm focuses on, such as energy, health care, or venture capital	Technical analysis and alternative investment strategies
Other Required Skills	Business acumen Financial analysis Research  Communication	Quantitative research Financial modeling Communication Time management

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