Business set up requires investment in the form of capital. A well-balanced business idea with a good track record can fetch a good number of investors in the finance market.
Raising capital and offering good advisory support is also a type of financial institution that operates in the world for a long time. There are indeed small investors who help the businesses with scaling up operations too.
The finance market is adding money to money and take a commission out of the revenue made. Going the extra mile, the financial institutions help set up the business and supports until the company can operate independently.
A lot of demand in such services still exists and the clients are simple business owners. There are many investment options like the Private Equity and the Venture capital, but their services are limited to the expansion of the business.
Though the investments from the above two are for the long term, there are risks involved in Venture Capital for the model it works. More importantly, Private equity investment begins in the last stage of expansion of the business.
The two prominent names that linger around in the name of business set up support is the Hedge Fund and Investment Bank. At the ground level, they operate a similar way but there are many differences in their operations.
Hedge Fund vs Investment Bank
The main difference between Hedge fund and Investment bank is that a Hedge fund is the investment avenue where it pools the investors to invest in various financial products using impeccable risk management techniques, while investment banking is a financial institution that offers advisory services to the businesses and helps raise capital.
Comparison Table Between Hedge Fund and Investment Bank (in Tabular Form)
| Parameter of Comparison | Hedge Fund | Investment Bank |
|---|---|---|
| Meaning | Hedge Fund is an investment group that pools funds of investors to invest in various financial products. | An investment bank is a financial intermediary that offers investment as well as advisory services to the companies. |
| Primary Objective | Hedge Fund’s primary objective is to increase the return for the investors in a very short period. | Investment bank looks at growth, safety, and income of the company it is catering to. |
| Risk Involved | Hedge Fund involves high-risk propositions, but have its risk management in place at adversities. | Very less risky when compared to Hedge Funds. |
| Investment | Hedge funds investments are made highly in liquid assets. | Investment bank supports various investment plans, it can be stock selling, identifying investing partner so and so forth. |
| Concentrates on | Short term Gains | Long term Perspective |
What is Hedge Fund?
Hedge Fund is a type of investment fund that deals primarily with liquid assets. It utilizes complex methods of trading to see returns in short term basis.
It highly relies on portfolio construction and risk management techniques to improve the performance of the funds invested. Hedge funds task is not only to find investors but to improve the performance of the investment.
Hedge Fund is made available for very high net worth individuals and institutional investors as it involves high risk. The hedge fund is considered as alternative investments.
Hedge fund though regulated, it uses highly complex leverages and complex investment techniques. This makes them different from mutual funds too.
The management style of Hedge funds is highly aggressive as it requires to offer more returns to the investors as that is the one promised. Hedge funds are open-ended, it means to say the investors are given the advantage to withdraw the capital based on the net value of the funds.
Hedge funds are not bound to any restrictions, however, it was put under few regulation frameworks when there was a crisis in the years 2007 and 2008.
Many Hedge Fund firms are existing, and they all operate in different modes altogether. As it is Hedge funds is not so much under any restriction, the need is high-end investors and a financial commodity to purchase.
What is Investment Bank?
An investment bank is a financial services company that supports businesses with advisory based financial transactions on behalf of their clients. The clients for investment banks are individuals, corporations, government, and any investment institution.
Investment banking is associated with corporate finance. It assists in raising capital for the organization by underwriting or acting as the company’s agent, in the issuance of securities.
One of the wide array of services offered by Investment banks is the mergers and acquisitions too. The investment bank has categorized the entire business area into three parts; Upper Tier, Middle-level Business, and Specialised Business.
Investment banks do not take a deposit, whereas other entities like commercial and retail banks take a deposit for their services. The investment bank is a huge formula for success for many organizations in the world.
Investment banking activity is put into two brackets; sell-side and buy-side. Sell-side is the trading of securities for cash or other securities, while buy-side is buying investment services for the organization. The investment bank is most trusted as they also have private and public functions. The insider information about the organization has never disclosed either side of the functionality.
Main Differences Between Hedge Fund and Investment Bank
- The main difference between the Hedge fund and Investment bank is the primary focus of the operation, the Hedge fund is the investment avenue where it pools the investors to invest in various financial products using top-notch risk management techniques, while investment banking is a financial institution which offers advisory services to the businesses and helps raise capital.
- Hedge Funds’ primary objective is to earn great returns in a very short period while Investment banks focus on the growth, safety, and income of their clients.
- Hedge funds involve many complex investment techniques and derivatives, therefore it is highly risky while Investment bank is well under control and less risky.
- The investments made through hedge Funds are highly liquid assets while Investment banks proposition is more on stocks and shares with multiple investment options from the investors.
- Hedge Funds concentrates in Short term gains while Investment Banks nurture long term relationships.
Conclusion
The main difference between the two is their client base. Hedge Funds focus primarily on high net worth individuals while Investment Banks on financial institutions. As there are risk factors involved, the investment amount is also not too much.
There are no experimental steps in Hedge Funds, but the return percentage is always more. Investment banking is a solid model for any investor, the money is secured and timely returns are always guaranteed. Hedge funds are for people who look out for quick money, while investment banks talk about stability all the time.
It is all in the development of an organization, where the latter offers advisory support which is not found in the Hedge Funds case.
References
- https://www.nber.org/papers/w16801.pdf
- https://www.ivw.unisg.ch/~/media/internet/content/dateien/instituteundcenters/ivw/wps/wp29.pdf
- https://archivefda.dlib.nyu.edu/jspui/bitstream/2451/27400/2/FIN-07-031.pdf