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tails to the public. Some funds would disclose this information to a small
number of important investors. More recently, funds of funds investors
have often demanded to know position details. A survey by Deutsche Bank
found that one-third of investors demanded transparency and information
about risk.
2
Only 3 percent of investors would invest in funds that refused
to provide any position information to investors.
Liquidity
Mutual fund investors generally may redeem shares at any time, not sub-
ject to restrictions on exit under normal market conditions. In some
cases, fees encourage investors to remain invested for several years, but
investors may otherwise exit without restrictions. Mutual funds generally
accept or redeem investments on the same day or next day. In contrast,
hedge funds allow entry or exit only at certain times of the year, monthly,
quarterly, or annually. In addition, hedge funds may restrict redemptions
for a year or more.
CONTRASTING PRIVATE EQUITY FUNDS WITH
HEDGE FUNDS
Private equity funds include leveraged buyout funds, venture capital funds,
mezzanine financing funds, and other portfolios of direct investment in pri-
vate corporations.
Legal Structures
Private equity funds entities are organized as limited partnerships or lim-
ited liability corporations if located in the United States or as corporations
in tax-favored offshore locations. Private equity funds use the same exemp-
tions that hedge funds use to escape many of the regulations that affect reg-
ulated investment companies.
Fee Structures
Private equity funds generally charge both an incentive and a management
fee much like the fees charged by hedge funds. Unlike hedge funds, though,
many private equity funds charge no incentive fees until individual invest-
ments are liquidated because there is no verifiable way to mark the assets
to market prior to sale. Upon sale, the investment and gain are returned to
investors less an incentive fee on profits. Occasionally, hedge funds will
Introduction
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