A hurdle rate is the minimum return a fund must achieve before the manager can charge a performance fee. It may be a fixed percentage or a benchmark such as a cash rate, and it can be hard (fee only on returns above the hurdle) or soft (fee on all returns once the hurdle is passed).
Hurdles are more common in private equity than in hedge funds, but emerging managers sometimes offer one to early investors as a signal of confidence. A hard hurdle of 5% means that a 12% year attracts a performance fee on 7%; a soft hurdle means the fee applies to the full 12% once 5% is exceeded.
Hurdles interact with the high-water mark: both must be cleared before a fee is earned.
Managers on POD can set a hurdle in their fund documents; the administrator applies it in the performance-fee calculation.
Get in touch for a demo
