Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
BENCHMARK PERFORMANCE FEES
Institutional accounts often base the hurdle rate only as of the beginning of
the Performance Fee calculation period, without regard to intra-period
profits or losses. Benchmark Performance Fees are often calculated on the
same basis. In these cases, when intra-period redemptions are made, the
hurdle rate base is not reduced by the dollar amount of the redemption
period but rather by the percentage of the BNAV for the current period
proportionate to the redemption. For example, if the hurdle rate base was
$1 million and the Fund had increased to $1.2 million when $600,000 was
withdrawn, the hurdle rate base would be reduced to $500,000 (i.e., by
50%, as was the NAV), not to $600,000.
Hurdle amounts in hedge funds - as opposed to private equity funds - are
typically reset to $0 as of the beginning of a Performance Fee calculation
period. In private equity funds, the hurdle rates (preferred returns)
compound until the capital commitments on which the hurdle amount is
being calculated have been returned.
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