Hurdles
A hurdle, in the context of a performance fee, is a level of return that the fund must beat before it can charge a performance fee. It may be a set percentage or it may be referenced to an index. The index would typically be either LIBOR (or an equivalent) or an index reflecting the underlying market in which the fund is investing. The purpose of the latter is to reward the fund for generating returns that are better than the market (alpha) rather than for returns generated simply by movement in the market as a whole.
If, in the worked example, there had been a hurdle of 4%, the performance fee would only have been charged on the additional 6% increase rather than the full 10% increase in NAV.
As hurdles reduce the size of performance fees and reward successful active management, they are popular with investors. However, as demand for hedge funds has been high in recent years, fewer hedge funds have needed to resort to their use to attract investors.
Read more about this topic: Performance Fee
Famous quotes containing the word hurdles:
“It’s not like I was out there running and not knowing what’s going on in the country. I knew what was going on, but I felt this is not something that is going to bog me down and not let me participate. The only way I was going to make a difference for myself or any other black person is to say the hurdles were there and do what I had to do.”
—Wyomia Tyus (b. 1945)