Difference Between Hedge Fund And Investment Bank

Would you like to invest your money and get higher returns in the long run? There are many factors that you should consider. While money might not essentially be an issue for many, most people usually have a dilemma about the right investment option to consider. This is because some investment options are riskier than others. If you are not careful, you might lose your hard-earned money.

When it comes to investment options, two of the prominent investment options that most consider are the Hedge fund and an investment bank. Although both investment options operate similarly, there are some differences that set them apart. In this article, we shall take a closer look at these differences so that you can make a wise decision when choosing any of them as your investment option.

What is a Hedge Fund?

The above-mentioned investment option is basically an investment fund that deals with liquid assets. When it comes to returns, this investment option is known to offer extraordinary returns. However, this comes with a greater risk as well. It is imperative to note that investment funds are usually closely monitored using different hedging and risk management techniques.

Generally, portfolios here usually get invested more aggressively. This is because investors need to get high returns as they were promised from the onset. In most cases, these portfolios are created by pooling many investors as well as their investment funds and then places them in different pooled assets.

Unlike other investment options, this one is only limited to a group of investors. Besides this, liquid assets are actually the main source of Hedge fund investments. As a result, this investment option is only ideal for individuals and institutional investors with an extremely high net worth. This is because the investment option involves a very high risk.

To put this into perspective, you need to have a minimum net worth of $1 million or more. Better still, you ought to have earned an income that is more than $200000 for the last 2 years. This way, you will be eligible for this kind of investment. As far as the investment portfolio is concerned, there is a myriad of options to consider. From land to currencies, there are many things you can invest in under this investment option.

Also, Hedge funds are normally open-ended. This means that investors have the freedom to withdraw their capital based on their funds’ net value. Finally, clients here are usually charged some fee. This includes the expense ratio fee, performance fee, among others. A good example is 20% fee from gains and 2% fee from asset management.

What is Investment Banking?

Unlike Hedge funds, an investment bank basically offers different businesses with advisory-based financial transactions. Some of the clients that investment banks serve include corporations, individuals, government, and other investment institutions.

Generally, investment banking is usually associated with corporate finance. Here, it acts as the company’s agent that helps raise capital by issuing securities. Besides this, it helps with mergers and acquisitions. It is important to note that investment bank has categorized the entire business area into 3 parts. These include:

  • Upper Tier
  • Middle-level Business
  • Specialized Business

Unlike other commercial banks, investment banks do not take a deposit for all the services they offer. Most companies, usually prefer investment banking as it is seen as a huge formula for success. Most companies have succeeded thanks to investment banks.

As far as the running of these banks is concerned, it essential to note that there are two brackets that separate these banks’ activity. These include:

  • Sell-side
  • Buy-side

The sell-side bracket refers to the trading of securities for cash or other securities for the organization they are serving. Buy-side on the other hand is the bracket for buying investment services for the organization. It is important to note that the investment bank is most trusted as it has both private and public functions. Here, insider information about the organization is never disclosed whatsoever.

Main Differences Between Hedge Fund and Investment Bank

Since we have looked at the above-mentioned investment options, time is ripe for you to know the main differences between them. After all, these differences will help you know the right investment option to choose now or in the near future. Here are the main differences between Hedge Fund And Investment Bank options:

1. Primary focus of the operation

Like we mentioned above, a Hedge fund is basically an investment avenue where investors pool their resources together with the aim of investing in various financial products. The only difference here is that top-notch risk management techniques are usually put into practice. On the other hand, investment banking is a financial institution that offers much-needed advisory services to different businesses and helps them raise more capital.

2. Main focus

The main focus of Hedge funds is to increase the investors’ returns as fast as possible. This is the reason why different investment portfolios are invested more aggressively so that the investors can get their own share fast. On the other hand, the main focus of investment banking is different as it is more oriented toward growth and the overall income of their clients.

3. Investment techniques

As far as investment techniques are concerned, the ones used in Hedge funds are more complex and derivative. As a result, they are very risky. However, those used in investment banking are more moderate and thus less risky.

4. Nature of investment portfolio

The kind of investments made through Hedge funds is usually highly liquid assets. However, those of investment banks are different as they include shares and stocks from different investors.

5. Concentration

Hedge Funds are usually concerned with short-term gains. This is the reason resources here are invested aggressively so that investors can get their returns quite fast. However, concentration in investment banks is different as more time and energy is spent on long-term engagement. If you choose the latter investment option, you may not get your returns as fast as you would with Hedge Funds.

Final Recap

Although hedge fund and investment bank options enable investors to get the value for their money, these two options are different in a number of ways. From their primary focus of operations to their concentration, there are many ways that these two investment options differ. As you purpose to invest in either of these two options, you should note the differences mentioned above. By doing this, will get the value for your hard-earned money.