Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
HARD VS. SOFT HURDLES
Hard hurdles are rare, and tend to surface only in the context of
strategies which involve retaining a significant amount of cash in
reserve (for example, futures funds' margin deposits) which generate a
return for which the sponsor is clearly not responsible. Most hedge
funds'- and all private equity funds' - hurdle rates are soft hurdles,
the difference being that soft hurdle amounts in hedge funds typically
reset to $0 at the beginning of each year, whereas in private equity
funds the soft hurdles cumulate through the years until the investor's
capital is returned. (When hurdle rates cumulate through the years, the
issue of how frequently they compound becomes relevant.
Annual/semi-annual is market. Compounding also begs the question of
whether distributions are credited first against capital - on which a
preferred return occurs - or against the preferred return - on which a
preferred return will not itself accrue until a compounding date occurs.)
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