Lesson 7 of 7 · 15 min
SMAs, ETFs, hedge funds and private equity
Beyond mutual funds, investors can use separately managed accounts for customisation, ETFs for intraday trading of a pooled portfolio, hedge funds for flexible long-short strategies with performance fees, and private equity or venture capital funds to buy, improve and sell companies.
In short
- Separately managed account (SMA): run for one investor who owns the assets directly; fully customisable (for example ESG exclusions), but with a much higher minimum than a mutual fund.
- ETFs trade on exchanges intraday, can be shorted or bought on margin, usually trade close to NAV, pay dividends out and have small minimums; mutual funds transact once a day at NAV directly with the fund.
- Hedge funds: private vehicles using leverage, derivatives and long-short strategies; aim for absolute returns; charge a management fee plus incentive fee (traditionally 2% and 20%); high minimums and restricted liquidity.
- Private equity / venture capital funds buy, improve and sell companies over a 7–10-year life, take a hands-on approach, and exit via merger, acquisition or IPO.
- PE/VC funds are limited partnerships: GP manages, LPs invest. Revenue: management fees (1–3% on committed capital), transaction fees, carried interest (about 20%, usually after LPs recover their investment) and investment income.
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