Private Equity Funds and Hedge Funds: A Primer

Private equity funds and hedge funds are both alternative asset classes that are continuouslygrowing in importance. Although they have different focuses, they share some characteristics.First of all, both have or allegedly have a significant impact on the economy as well as thefinancial system they operate in. Therefore, the question of a potential regulation of both assetclasses arises. Due to the lack of sophisticated knowledge about the differences of these assetclasses, market players fear that attempts to regulate hedge funds will adversely affect privateequity funds. Besides the regulatory issue, there are several other links between these twoasset classes that have to be looked at. The relationship between those two asset classes istherefore of general importance.Last months’ developments in the hedge fund industry (e.g. rumors about turbulences as wellas hedge funds forcing the dismissal of the CEO of Deutsche Börse AG) have now even led toa broad public debate about private equity and hedge funds. At least in Germany the debatehas been partly fueled by the fact that both types of funds are highly funded by institutionalinvestors from abroad. Due to this, the debate widened and included criticism on “Anglo-Saxon style” capitalism as well. In the light of the last German elections, hedge funds andprivate equity funds have even been compared to locusts, notorious for exhausting companies.However, the distinction between hedge funds and private equity funds remains very vague inthis discussion, so that deep mistrust is spread among the public opinion against these new,mostly unknown and misunderstood types of investors.[...]