Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
HURDLES
It is important to think in terms of hurdle amounts rather than hurdle rates. A
hurdle rate will be a percentage of some sort that does not change when there
are redemptions or additions. However, additions and redemptions directly
affect the amount that must be earned to achieve performance subject to a
Performance Fee. When thinking about the Performance Fee calculation, one
needs to refer to amounts not percentages. When an investor redeems 50% of
its account on June 30, that does not reduce the hurdle rate, but rather the
base to which the hurdle rate is applied. The base to which the hurdle rate is
applied is adjusted and the hurdle amount calculated year-to-date
proportionately reduced. As redemptions and subscriptions are themselves
dollar amounts, not percentages, trying to describe a Fund's hurdle rate
accurately in terms of hurdle rates rather than hurdle amounts derived from
hurdle rates is an "apples and oranges" proposition.
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