Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
THE HURDLE RATE ANOMALY
In a mark-to-market world in which hurdle rates are calculated on a year-to-year basis, there is an
anomaly. If a sponsor has a 5% hurdle and earns 4% a year forever, he will never receive a
Performance Fee; however, if the sponsor initially loses 10% and then earns 15%, the sponsor will
receive a Performance Fee even though his/her inception to date performance is worse than if such
sponsor had earned 4%.
Year One
BNAV $100
ENAV $104
Hurdle Rate $105
Year Two
BNAV $104
ENAV $108.2
Hurdle Rate Level $109.20
Return
4%
No Performance Fee
Return
%4
Lose $10 in Year One and Year Two Hurdle Rate
BNAV $90
ENAV $103.50
Hurdle Rate Level $94.5
Return
15%
Hurdle Rate $109.2
$108.2
$103.5
No Performance Fee
Performance Fee 20% ($3.5)
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