The Difference Between Hedge Funds, Private Equity, and Venture Capital

So what is the difference between hedge funds, private equity funds, and venture capital funds, and how do these 3 different fund types play together? We're gonna talk about what these funds are and even sub-funds underneath them. For example, Jim Campbell spent $300 million so that his hedge fund could run a fiber optic cable from Chicago to New York that would allow them to insert their trades a millisecond faster than other firms. We're gonna talk about the sub-strategies beneath private equity, the sub-strategies beneath venture capital and hedge funds, and how they all play and work and sometimes compete against one another. Now, for those of you who don't know me, my name is Bridger Pennington. I currently run an 8-figure hedge fund and we've helped hundreds of people launch their own funds as well. So let's go to the whiteboard here. Where do these 3 firms play together? Right here we have this growth curve of a business. A business will start from zero. They will then play usually in the private markets. Eventually one day they hope to play in the public markets, typically through what's called an IPO or an initial public offering. offering. And this is where things start to differ and overlap. Venture— so start from the beginning. Venture capital down here. If you guys have seen Shark Tank before, this is where venture capital plays. Venture capital will play in the early startup phase of business. A business is right here at zero or sometimes even negative, and venture capitalists will come in in hopes to invest in these startups. Now there's a few different types of venture capital firms. You have firms that come in at the very early Seed stage. They are sometimes, they wanna be the first check into a business. We have a partner group that we work with. They invest, they like to invest $25,000, $50,000, similar to like a Shark Tank type of business. Other venture firms like to come in different stages. Typically venture goes through a stage called seed, Series A, Series B, and Series C, and that works up this curve of seed, A, B, and if they need it, C, they can keep going to D, E, F, G. Now these rounds of funding, I'll put A here and B and C, is rounds of funding that they can raise if they want more capital. Oftentimes a Series A is maybe roughly $5 to $20 million Series A, but it's their first round of official funding after a seed round, if they even have a seed round. A lot of venture capitals will like to enter the market here around a Series A or maybe Series B. Now this is where private equity comes in. Private equity likes to come in a little bit later on the life cycle of venture, and this is where they start mixing. Sometimes private equity firms will enter businesses on the Series B round, and also venture capital firms are investing at a Series B round. Now, there's a number of different private equity firms, and they will do all sorts of different things, but on this life cycle, they sometimes will enter the business here with the ultimate goal of growing this business to sell it at a later stage. Now, some private equity firms enter here and hope to sell to maybe a different private equity firm in the future. Some take it full tilt and sell it to the public markets here through an IPO, and that's where they make lots of money. Then all of a sudden the public markets can now trade, and that's where they get liquidity on this process. Some private equity firms are called distressed private equity firms. They will come— that's why I put this dot here. Sometimes businesses are in decline, and they actually are right maybe on this part of the life cycle, and they kind of suck, and private equity firms will come in and rip the business apart and restructure things in order to bring it back to where it's in good graces again that they can either grow it and sell it to somebody else or maybe IPO in the future. There additionally, there are asset class specific private equity firms. Some private equity firms only do like you could call it real estate private equity or a real estate fund. They come in, they buy private real estate which would still be private equity. They buy private real estate, pull that together, they scale or value-add or whatever they're going to do to that real estate or infrastructure or other things to grow and scale that. Another interesting private equity model is the hub and spoke model. There are certain private equity funds that come in and use an example of like a dental practice. So, they'll come in and buy a dental practice and they could just buy that thing, that dental practice, but then they think, well, what if we bought all the ancillary businesses around a dental practice for this example. So, this is called a hub and spoke model. They have a hub of just, let's call it dentists. They pull these dentists together but then guess what? Every dentist, what do they need? Well, they need like a software to input, I don't know, all their dental needs. They put it into a software so they go actually buy or build that software. Well, guess what? All dentists need certain tools and materials that they have to use. I'm sorry, I'm not the best versed on dental things but they have certain items, so they go buy that part of their supply chain. Guess what? Dentists all need marketing, so they go buy a marketing company that gets them leads. They centralize a finance team. All of them need finance and payroll needs, and most dentists, they don't want to worry about finance or marketing or buying up their supply chain or softwares, so what happens is a private equity firm comes and pulls all these ancillary businesses together into one conglomerate. And that conglomerate is very valuable when you pull those things together, and they usually can sell it for a greater multiple than what they bought it for. This also allows them to funnel in hundreds or thousands of dentists into this model because we have world-class marketing and world-class finance and our full proprietary software that's all in-house, and you get to work with other dentists in the region, and we can help with hiring and firing and HR management. All these different tools can come together Again, that's an example of one option in the private equity world. So now back to our whiteboard here. We got venture capital that plays at a seed, Series A, B, C rounds, and that's where private equity starts mixing. They come in at maybe an A or a B or a C round. They can work through as a growth equity play, an asset class play, a growth equity play, distressed play through this whole model. Then eventually they IPO. A business will come into the public markets, and that's where hedge funds play. By definition, hedge funds are playing in public securities. So this is stocks, options, bonds, forex, crypto, all plays in this market as you would call them a hedge fund. So I currently run a blockchain or a crypto fund. We have 8 figures that we manage in the public markets as a hedge fund. Now there's a few different main types of hedge funds. There's more than this, but there's a few categories. Number one, you call them an algorithmic or a quant based fund. A great example of this is Jim Simons. He was kind of the father of the first algorithmic or quant fund, and rest in peace, Jim Simons. But he came and said, let's gather together the smartest people on earth, mathematicians, PhDs, all into a room and figure out if we can crack the public markets, crack the stock market. Can we find mathematical things that we can put into a computer and allow that computer to go trade for us? Jim Simons' Quantum Fund was one of the most successful funds ever on Wall Street. Their Medallion Fund, which was their core flagship fund, their Medallion Fund was producing 50%, 60%, 70% per year. It was so successful, they have not raised money for over 2 decades and it's only closed to close family and friends because per— and we'll talk about this in other videos, we talk about limits on funds, how much they can raise, how many investors they can have. Crushed it. Rest in peace, Jim Simons, but really cracked the code on algorithmic trading and now has spurred on hundreds of thousands of wannabe traders out in the world that are gonna go figure out their own algorithm or quant fund. I work with a lot of people that found some guy in Miami that's got this brand new trading bot and they're selling it. There's a lot of scams out there, so look out for scams when you're on that. Okay, next one, high-frequency traders. This is somewhat similar, but I mentioned earlier Jim Campbell, high-frequency trader. They found that they would trade the fractions of a penny on a stock and they could trade sometimes 10,000, 100,000 trades in a day because they would trade these little slight variances inside of their fund. Now, there's been a lot of legislation put out to try to ban high-frequency traders because they are algorithmically playing the market. It doesn't matter if the market goes up or down. They just make money on the little changes up and the little changes down. speed of trades is very significant here. That's where Jim Campbell spent $300 million running a fiber optic cable from Chicago to New York so that his trades were a fraction of a second faster than other people's trades. Now, another example on this, not as high frequency, but a few years ago, Robinhood, when there was the big GameStop AMC play and everyone was going crazy, Citadel was paying for order flow From Robinhood and the theory is that what would happen is a lot of people like us are going to buy GameStop, we put our orders in and Citadel had a contract with Robinhood that said, well, before those orders— let's say there's a bunch of buy orders and the stock's getting bought up. Before those buy orders go in, Citadel could front-run and say, well, we're going to buy first and then we'll let all these people buy and algorithmically that'll make the stock price go up or go down and you can front-run trades. Again, that's why there's a lot of legislation out against this and trying to figure out how to stop this, because it's real. A lot of market manipulation can happen at the high ends of Wall Street. All right, on to the next one here. Okay, algo, high frequency. Let's talk about research-based funds. Now these funds do the kind of the exact opposite of these 2 funds. These funds do a lot of research up front. A great example is Hindenburg. Hindenburg Research has been a very activist and research-based funds. One of their biggest ones was Nikola. Now Nikola was a Tesla competitor, this is a few years ago, and Hindenburg came out and said, I don't think Nikola is being completely honest with what their marketing they're putting out. Nikola had this pickup truck they were going to put out, semi-truck fleet. I actually know a lot of personal investors that put a ton of money into Nikola, and one of their ads they put out was Nikola in motion, and what it showed was a semi-truck like in like the Running down a street like driving was amazing. Wow, this is gonna be the first fleet of electric semi-truck vehicles. They're beautiful, they're amazing. It's gonna transform the world. This is the next Tesla, and the name was off of Nikola Tesla. It's like, wow, this is gonna be amazing. Well, Hindenburg Research did a little analysis and said, well, I don't think these trucks are actually running, and they dig in and they figured out the ad, the advertisement was called Nikola In Motion, and what they had done was put a truck at the top of a hill and pushed the truck, and the truck was in neutral, and yes, it was in motion, The truck went down the hill, but it misled investors. And it was actually showing that these trucks aren't actually driving. They don't actually have an electric truck fleet of vehicles. They just pushed a truck down a hill. This was a hedge fund that came out and did this. Ultimately, this led to a massive sell-off in this stock and really restructuring. I think Nikola's still around today, but huge decimation of this company. The founder, Trevor Milton, actually has been sentenced and has a bunch of prison time and fines and all this kind of stuff that he's had to deal with because of an activist hedge fund that came out and did some research. And what they do, by the way, before they publish that research, they take a massive short position. So they took a huge short position, then they published the research. And by the way, the research has to be true. If the research is not true, then they can get fined. They might be manipulating the stock with false information. In this case, the research was true. The courts found that they had actually misled investors. Hindenburg Research made a bundle of money and did extremely well. The last one on this list is an activist-based fund, which I kind of talked about with research. Additionally, on research, this could be funds that just go and try to find undervalued stocks on the market or overvalued stocks on a market. They do a lot of research to put different trades in the market. They usually do swing trades, 6, 12, 18, 24 months. This would be more of a Warren Buffett type of investing platform. Warren Buffett, you'd call as a He's a research-based investor, does a lot of research up front, has all of his great things that Warren Buffett talks about. Him and rest in peace Charlie Munger, they would be in this camp. Finally, you have activist down here. This is a little bit like Hindenburg like I talked about. This is like a Bill Ackman or a George Soros, kind of the boogeyman of the world right now and maybe is collapsing the world as we know it. But activist investors come in and actually they place a position but they also take an active seat on the board. Or they come in and actively try to disrupt that stock or country or whatever. A good example is George Soros. George Soros is the boogeyman for a lot of stuff because he's done this in the past. George Soros went against the British pound and was very public and open about him shorting the pound. He ended up making around $10 billion going against the British Central Bank. Other people have theorized he led to the downfall of Venezuela, took huge major short positions in Venezuela. He did a similar thing with Thailand and Thailand's currency. So he likes to find countries, destabilize those countries, and make a buttload of money while doing it. Now, that would be a very negative activist approach. There's sometimes positive activist approach where you say, hey, we're going to join this board. We're going to join the board of Herbalife if you're Bill Ackman, and you join that board, you're going to help them grow, and you're going to promote that company as an activist investor into that. Now, if you want to learn more about launching your own hedge fund or private equity or venture capital fund, we have other videos on that, how they're actually structured, how they work with the SEC. So click down below, give us a like and a follow if you like this video. Help us to know what content to put out, what you guys like. Thanks so much. See you in the next video. Bye.