Hurdle rate
A return a fund must clear before any incentive fee is earned.
Where you will meet it
Hurdle rate appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set out the strategies hedge funds use and how they charge fees
“A high-water mark stops the same gains being charged for twice after a loss, and a hurdle rate withholds the incentive fee until a threshold return is cleared.”
- Explain how risk measures can guide decisions on allocating capital
“The aim is to direct capital where risk-adjusted return is highest and exceeds a hurdle rate.”
- Contrast the main forms of investment manager contract, covering their key provisions and their advantages and drawbacks
“Key provisions to compare include the base fee, the share of excess return, the benchmark or hurdle rate, high-water marks, fee caps and floors, clawbacks, the measurement period and crystallisation frequency.”
- Work out hedge fund fees and explain what they mean
“A hurdle rate means the incentive fee applies only to returns above a stated threshold, and it may be hard — charged only on the excess — or soft, charged on the whole return once the hurdle is cleared.”
Practise it
Practise hurdle rate until it is automatic: questions that explain every wrong option.
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