How VC Funds Work
What is the difference between a VC fund and a hedge fund?
VC funds invest in private, early-stage companies and are illiquid for years. Hedge funds invest in liquid public markets and can enter and exit positions quickly. They have very different risk profiles, time horizons, and investor bases.
Venture capital funds and hedge funds are both alternative investment vehicles, but they operate in fundamentally different ways.
VC funds invest in private companies — startups that aren't publicly traded. Capital is locked up for the life of the fund (typically 10 years) because there's no public market to sell shares on demand. Returns come from exits: acquisitions or IPOs. The asset class is highly illiquid and high-risk, with the expectation that a small number of big winners will return the fund.
Hedge funds invest primarily in liquid public markets — stocks, bonds, derivatives, commodities, currencies. They can and do move in and out of positions daily. Many hedge funds use leverage and complex strategies (long/short equity, global macro, arbitrage). They're also subject to different regulatory regimes.
The LP bases are different too. Both require accredited investors, but hedge funds often allow redemptions on a quarterly or annual basis, while VC LPs commit capital that's drawn down over years and can't be recalled.
The risk/return profile is different. Hedge funds aim for consistent, risk-adjusted returns — beating the market or achieving uncorrelated returns. VC funds are explicitly shooting for outlier outcomes: power law dynamics mean most investments fail but a few return 100x.