BUS614 Study Guide

Unit 5: Hedge Funds and Private Equity

5a. Evaluate the role that hedge funds play in international financial markets

  • What is the significance of Hedge Funds?

Hedge Funds are a type of private equity fund where assets are pooled from a group of investors and managed by professionals for risk minimization and profit maximization.

These funds use a variety of strategies to reach the goals of risk reduction and profit maximization, and they charge their investors omissions in managing the fund and the profit generated.

To review, see How Hedge Funds Work.

 

5b. Differentiate between hedge funds, private equity, and venture capital

  • How would you differentiate between hedge funds, private equity, and venture capital?

Though, in theory, hedge funds are a form of private equity fund, they are different. Their similarities start in their investor portfolio, where they both appeal to high-net-worth investors. They are also similarly structured, and they could invest in private companies directly, and both use leveraged buyouts (LBOs). Private Equity Funds invest in companies directly, providing these companies the opportunity to remain private. Private Equity Funds could also buy stock of publicly traded companies to delist them. Unlike Hedge Funds, Private Equity Funds are more interested in long-term investments.
 
Venture capital is a form of private equity fund where investors are interested in investing in new companies (start-ups) and small businesses that are perceived as solid investments having the potential for long-term growth. Notably, VCs could provide monetary support to the companies they invested in and technical and managerial support and advice.
 
To review, see Private Equity and Venture Capital.

 

5c. Differentiate between different types of investment strategies, such as value investing, income investing, growth investing, small-cap investing, and socially responsible investing

  • What are the different investment strategies?

Value Investing

Generally, one of the main investment strategies is Value Investing. This strategy entails choosing stocks that appear to be trading for less than their intrinsic value. Investors would buy what appears to be underpriced stocks in the hope that the value of these stocks will appreciate.
 
To review, see Value Investing and Growth Investing.

Momentum Investing 

Through this strategy, investors typically buy shares and securities that experienced high returns over a particular period and sell those that experienced poor returns over the same period.
 
To review, see Momentum Investment, Strategic Investment Funds, and Value Investing and Growth Investing.

Growth Investing

A growth investing strategy focuses on increasing investors’ capital through investing in small companies with expected earnings higher than the average rate. In that sense, it focuses on companies that are experiencing or might experience a high degree of growth.
 
To review, see Value Investing and Growth Investing.

Other Investment Strategies 

In addition to the mentioned strategies, there are other strategies that investors may use. For example, investors may opt for what is known as income investing, where investors aim to build a portfolio that generates regular income. They may decide to invest in stocks with a small market capitalization in what is referred to as small-cap investment, or they may opt for a socially responsible investment strategy that aims to generate financial returns and influence social changes.
 
To review, see Value Investing and Growth Investing.

 

Unit 5 Vocabulary

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

  • Hedge Funds
    • Hedge Funds are a type of private equity fund where assets are pooled from a group of investors and managed by professionals for risk minimization and profit maximization.
  • Private Equity Funds
    • Private Equity Funds are a form of pooled investment whereby these funds invest in companies directly, providing these companies the opportunity to remain private.
  • Venture Capitals
    • VCs are a form of private equity fund whereby investors are interested in investing in new companies (start-ups) and small businesses that are perceived as solid investments with the potential for long-term growth.
  • Fixed Income Arbitrage
    • Fixed Income Arbitrage is an investment strategy that aims to generate positive returns by identifying price anomalies in fixed income securities.
  • Convertible Arbitrage
    • This investment strategy aims to generate profit on price discrepancies of convertible securities, such as callable bonds.
  • Income Investing
    • Investors here aim to build a portfolio that generates regular income.
  • Growth Investing
    • This strategy focuses on increasing investors’ capital through investing in small companies, with earnings expected to be higher than the average rate.
  • Small Cap Investing
    • Using this strategy, investors invest in stocks that enjoy small market capitalization.
  • Momentum Investing
    • Investors opting for this strategy typically buy shares and securities that experience high returns through a particular period and sell those that experience poor returns over the same period.
  • Socially Responsible Investing
    • Investors use this strategy to generate financial returns and influence social changes.
  • Value Investing
    • Investors buy what appears to be underpriced stocks in the hope that the value of these stocks will appreciate.