The Difference Between Hedge Fund vs Private Equity

Hey guys, welcome back to Investment Fund Secrets. So today we're going to talk about the differences between private equity funds and hedge funds, and it's been kind of fun. I'm now kind of the fun guy online. I talk a lot about funds, how to structure them, how to start them. Our mastermind groups, we teach people how to launch their own funds. So I've recently been doing a lot of history lessons on the beginnings of funds, the first ever private equity fund, the first ever hedge fund, and how they've evolved. evolved into what we have today. So in this episode, we're gonna talk about the difference between private equity and hedge funds. So I've been researching a little bit. The first ever deemed private equity fund was actually back in 1901, and J.P. Morgan— not the company, the man himself, the man J.P. Morgan— bought out Carnegie Steel Co. for $480 million. Huge purchase, one of the first time anyone's ever done something like this before. And he put it under the Bessemer Trust. Trust Companies, as we called it, and that was essentially the first ever private equity transaction that at least is dated in America, and that kicked off this revolution of, hey, instead of building a company from the ground up, I could just get money together and go buy a company. Seems a little bit easier, right? And now it's evolved. You have these corporate raider type of people that come in, they fire all the staff, they break it into parts, and they sell it into pieces. There's other private equity companies that come in, they wanna buy a company, restructure it, and grow it, And then eventually sell it as a whole. There's lots of different strategies within private equity, but at the basis, if you don't really know what I'm talking about, private equity is essentially a fund that'll go out and buys private equity or private stakes in usually very large companies. And most of the time they're private companies. That's kind of the term private equity. So for instance, you'll see private equity companies right now going out. Sycamore Partners, great example. They just are looking at closing on Victoria's Secret and taking controlling interest in that. They own Aeropostale. I think Nine West are these companies that they go out and buy. Apollo Global Management, one of the biggest private equity funds in the world. They own Walt Disney, ADT, Claire's, a handful of other of their portfolio companies that they wrap up under one roof. Pretty cool, right? That's why some of the wealthiest people on the planet run private equity funds. They go out and can buy these huge companies and leverage them and buy anyways. It's incredible what they do and I talk about that a lot in other episodes. So that was the beginning though. JP Morgan, the man himself. Dude, JP Morgan never fails to disappoint in the history books. I love stories about him how he's Saved America a couple of times. I mean, it's just incredible what he's done. Now, the first ever hedge fund, and we're going to talk about a second that comparing the two, the first ever hedge fund termed was by A.W. Jones. A.W. Jones has written a few papers on different things with modern portfolio theory, his theories for how to make more money inside a fund and hedge against risk. Essentially what a hedge means, and we'll go a little bit basic here, what a hedge is, is when you have an investment And a great example of this is, let's call it the S&P 500 versus gold. Typically— now this hasn't been true the last little bit, but typically, typically, okay, the markets are all over the place, but typically when the S&P 500 or index funds are up, the market is generally up, gold tends to go down. But when the markets crash, gold tends to rise, and they are counter to each other. So if you were buying all index funds like S&P 500, you're buying those You would buy gold as a hedge just in case the markets all crash. You're gonna balance out and be okay. And A.W. Jones, in his paper, through math, he predicted and proved that if you hedged over time— because hedge, essentially what a hedge does is it hurts your gains, but it minimizes your losses. But he, through math, figured out that it actually made you money over time, and he launched the first Ever hedge fund. And what's interesting about what A.W. Jones did, he launched the first ever hedge fund and he called it a hedge fund, he raised money, he started doing these hedging theories where he would buy stocks that were counter to each other and pit them against each other but would make money over time. His fund started doing well. Within the first 8 years, 400 copycat funds started out as hedge funds on Wall Street around the world. 400. Funds start out of nowhere and it goes back to the 4-minute mile type of theory. If you guys remember the 4-minute mile, they believed it was not humanly possible to break the 4-minute mile and finally one guy does. I forgot his name, I read his book though, I forgot his name, I was blanking my name right now. He breaks the 4-minute mile and ta-da, all of a sudden within I think 3 or 4 months, 4 other people had also broken the 4-minute mile. And it wasn't that they were all of a sudden faster, it was that they believed they could do it. I think it's very interesting with the stuff, the content we create. I'm trying to show you that I run a fund, all these other people run funds. I'm trying to break down the belief that you can do it. This is the 4-minute mile. So that's what A.W. Jones did. So these are the kind of the histories and backgrounds of private equity, JPMorgan, A.W. Jones, and those have evolved to today. And essentially the contrast between private equity funds today and hedge funds today is hedge funds— now these are broad terms. A lot of hedge funds today actually don't hedge their funds very much. Typically today, and this is typically, right? Every fund is different and these are broad terms. Typically, private equity funds today go and buy private stakes in massive companies and they will either buy a portfolio of companies, group them together and sell them to bigger private equity companies, or they take them and IPO these companies, or they take them and split them into different pieces and sell those pieces for a profit. That's usually their plans. Now, some, they call them corporate raiders. They'll come in and fire all the CEO staff and re-whatever they want to do. There's totally different ways to manage things, but that's typically what private equity funds are doing. They're buying private stakes and private equity in, could be real estate, it could be private companies, That's the term there. Hedge funds, on the other hand, are actually a little bit more broad nowadays. A lot of these hedge funds on Wall Street, you usually have a really strong charismatic leader at the top. You have Bill Ackman, you have the Tiger Global Management, I mean, you have some incredible hedge funds on Wall Street with really powerful managers, George Soros, right, that you trust and you say, George Soros, we trust in what you do, you can pretty much do whatever you want on the public markets. So most hedge funds are trading on the public markets right now. They are, and there's an incredible book called More Money Than God, and it goes into the history of a lot of these hedge fund managers from, I think, the '70s until now. These amazing deals where George Soros takes on the British bonds and British pound, and he actually shorts their entire currency and wins. There's incredible stories of these fund managers that take huge risks and have massive gains and really as an investor, they're saying hey, George Soros, Bill Ackman, we trust you with our money. Do something good. We don't care if it's— and More Money Than God, that book, they go to Thailand, they short the Thai currency, they go to Japan, they short that, they come in, they buy. I mean it's incredible what power they have, that's why the book's called More Money Than God. Don't love the title, I'm kind of a God-fearing person but what they do is absolutely incredible and they run funds to do that. Now, some hedge funds have a leader that goes way off and makes a big bet and it fails and everyone loses their money and they understand the risks of being involved with a more of a speculative type of hedge fund right now. Now, there's some very safe hedge funds that are long-term that take a pension plan and they're very long-term but typically, those are the 2 buckets you're in right now is those private equity funds, that's kind of the contrasting difference. Private equity is buying stakes in private companies Hedge funds are doing pretty much anything on public markets. I want to say, I want to keep it broad because hedge funds do a lot of different things. For example, there are hedge funds out there, Long-Term Capital Management, very famous hedge fund in the '90s. All they were doing was they found that the 30-year US bond was at a certain price, 30 years, and there was a 29.75-year US bond that no one really knew about. And obviously, the 30-year bond is more common, more— it's going to be overbought and overvalued, and they were They had these two currencies against each other, and they were figuring out if they bought the 29.75-year bond because it's not as popular. Nobody knew about it. They could find alpha in that bond and short the other bond against each other. Anyways, incredible fund. They did very well until Russia defaulted on their bonds, and Russia defaults on their bonds. All these Russian investors and people that are invested in Russia and a few other European countries all. Flood to America for safety and they all buy out the 30-year bond because it was so popular. And they're shorting that bond, the bond goes up and up and up and up and they're like, it should come down, this doesn't make any mathematical sense, but the bonds kept going up and eventually blew up their entire fund and they got wiped out. So there's incredible wins and incredible losses inside of this fund world. Last story I wanna tell you, I've told this before, but Bill Ackman just barely did this like 2 months ago. Bill Ackman on Wall Street, He gets on right before coronavirus. Coronavirus is creeping up. Markets are still high, but coronavirus is starting. You're starting to hear whispers and worries about coronavirus. He gets on CNBC, and he's a big hedge fund manager. What do you think, Bill Ackman? What's going to happen? And Bill Ackman says, all hell is about to break loose. This is going to be the craziest thing we've ever seen. Huge. I mean, I'm worried for my dad's life. He just gets on in doomsday's country goes, I don't know if we're gonna financially recover from this. This is gonna be the worst thing we've ever seen, and lo and behold, we wake up next morning, markets take one of the biggest crashes in history the next day, plummet, and you guys have watched the markets last couple of years, it's been this crazy roller coaster all sparked with— I mean, there's the looming thing, but Bill Ackman really set it off, and little did everyone know, Bill had a $26 million short on the market. He turned $26 million into about $1.6 billion in a matter of 3 weeks. And I think it's more than that. As of today, I think it's up to about $2.5 billion. Wild what he was able to do. And he kind of tricked everybody, right? But that's what hedge fund managers do. We trust in Bill Ackman that he's going to make good decisions whatever it is. He can short the market if he wants. He can go long here. He can— whatever currency he wants to manipulate, he can do it. And I think most hedge funds right now have very broad Parameters on the LP and PPM. And very— private equity funds are fairly broad. They're looking for more strict things. A lot of smaller funds are looking for very narrow niche things. Like my funds are very narrow. They're down to we only do certain debt deals that fit these perfect parameters where we can find alpha. A lot of small funds, we only do 8-plex apartments. That's it. We only do 8-plex because we can really work those well. We found that we can make the most money doing 8-plexes. A lot of funds I see are more narrow when they're small, and then once you build a huge name for yourself like Bill Ackman or George Soros, then you can go broad and investors just trust on you as the jockey. Anyways, hope that helps contrasting private equity versus hedge funds. Kind of an incredible world, and we talk a lot about this in our mastermind groups and our other stuff, and I think it's just fascinating how much money is flying around our heads that we have no idea what's going on. You just gotta pay attention, start watching. What's going on? Because it's an incredible world of finance, and it's addicting. You start watching the markets. You start watching what these big players are doing. It's addicting to watch, but it's also addicting to be a part of it. And for me, launching my own fund to be in the game—not just be a spectator in the stands—but actually have my own fund and watch—it's been pretty fun. So anyways, hope you guys enjoy. If you like this, please leave us a review or subscribe. We'd love to to get involved with you guys. Send hit me up on Instagram. I love responding to those DMs. So. Hit me up there, I'd love to give you a video response or whatever. If you have questions or comments, whatever you wanna say on there, but we'd love to hear more from you guys and I'll see you on the next episode. Peace. Peace.