Understanding Hedge Fund Fees: Implications for Hedge Fund Managers

K&L GATES WHAT IS THE HURDLE RATE TRYING TO DO / BE? Is the proposed Hurdle Rate a "cynical Trojan horse" marketing scheme? Is the proposed Hurdle Rate an accounting convention simplifying the exclusion of a particular component of potential Trading Profit which is not supposed to be included in the profit on which the Incentive Allocation is paid (i.e., interest income in futures funds)? Is the Hurdle Rate supposed to avoid the insult to investors of paying the GP for performance in a year which is below the "no brainer rate"? Is the Hurdle Rate a temporary benefit to induce existing investors to transition to a restructured fund, but which is supposed to be eliminated, and retroactively, after a limited "holiday" period? Is the Hurdle Rate a proxy for other uses of capital that the investor could have employed rather than investing in the Fund? Should the Hurdle Rate be always effective, or should outperformance in one year potentially eliminate any practical' effect for the Hurdle for years to come? Is the Hurdle Rate Year-to-Year or Cumulative? Cumulative sounds more "investor - friendly," but backfires if there is a "home run year." If there is a Hurdle Rate in place, should the unpleasant individuals who chose to redeem be able to benefit from it, or are they back to a standard HWM calculation? klgates.com 33 33

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