system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5 Venture capital vs. private equity vs. hedge funds?

Can someone please explain to me what each of these are and what the differences between them are? And give examples as well? Please help me, I've tried to hard to understand to understand what they are and my brain just will not process it and I'm getting so frustrated.
gpt
Most answers here are at best partially correct. Here is the correct answer.

Venture capital invests in companies that are typically based on some innovation or novelty, that are young and have a strong future potential to earn 100x the money invested. The VC model is that 7/10 of these investments will fail completely, 2 will become zombies i.e. just about successful but never really breaking out and 1 will be so success it will pay for all the other failures as well as creating a big profit. Venture funding amounts start at seed stage with a few hundred thousand dollars and can go as high as 100 million. Venture capital is high risk and potentially high reward investing. As an analogy, VC investors build new houses with new designs in sometimes marginal areas that are currently undervalued.

Private equity investors are less risky. They are looking for mature businesses with steady cashflows that provide stable returns on their investment. They are also looking for ways to operationally restructure or financially engineer the investment to release more value. For example they may see ways to get hard cash from the business by selling off some areas or restructuring operations to reduce the amount of cash stuck inside the business in the working capital. They can literally deploy billions for the right invesrment, but often hold for relatively short periods, 2-4 years, while they improve the business and then sell it on. As an analogy, PE investors buy old houses in nice neighborhoods, fix them up and sell them on for profit.

Hedge funds invest in ways that try to ensure they make money no matter what happens, by investing in both positive and negative outcomes of the same investment. Hedging is the practise of investing in both positive and negative outcomes, typically using different means, for example by buying a stock and using derivatives like options or futures to offset any negative movements in the future. Hedge funds invest in highly liquid markets typically, so they can react quickly to changing circumstances, and are typically very private and highly sophisticated investors, using lots of technical ways to balance or even better exploit risks. Again they can command massive sums - tens if not hundreds of billions in some extreme cases, because a small edge multiplied by a lot of money equals a big profit. As an analogy, if a hedge fund bought a house, it would also buy some kind of insurance in case the value dropped below expectations. The expected growth would cover that extra cost, and the insurance would make sure they covered any potential drop in value.