A hurdle rate versus a high-water mark | Mint
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Business News/ Money / Personal Finance/  A hurdle rate versus a high-water mark

A hurdle rate versus a high-water mark

The hurdle rate implies the minimum rate of return mandated by an investor or a fund manager to charge performance fee.

Photo: AFPPremium
Photo: AFP

The fee structure in PMS (portfolio management service) or AIF (alternative investment fund) space may include two primary components–management fee and the performance fee.

The management fee is charged irrespective of the returns charged by the fund and is usually a fixed annual percentage of the net asset value of the fund.

While the performance fee can be determined in various ways, it includes having a hurdle rate or both a hurdle rate and a high-water mark. The hurdle rate implies the minimum rate of return mandated by an investor or a fund manager to charge performance fee.

Munish Randev, founder and chief executive of CERVIN Family Office, explains this with an example of a fund that has a high-water mark with a hurdle rate of, say, 10% and an initial investment of 100. The performance fee is triggered only when that investment goes beyond 110 ( 100+ 10 hurdle). With high-water mark, the fund cannot charge the next performance fee until the investment goes beyond 110. If the investment value drops in the second year to 80 and delivers 30% in the third year to take the investment to 104, no performance fee can be charged in the third year though it has beaten the hurdle rate of 10%. This is because 104 is still lower than 110. Thus, high-water mark ensures that fee is not paid on the same value of investment return when recovering from losses.

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Satya Sontanam
Satya Sontanam is a senior content creator at Mint with a keen interest on data crunching, analysis and the story behind trends. She writes on personal finance including investments, regulations and data stories. Before joining Mint in December 2021, Satya worked as research analyst and also a personal finance writer at The Hindu BusinessLine. Satya is a qualified chartered accountant. In her free time, she enjoys doing yoga and listening to podcasts.
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Published: 11 Apr 2023, 12:01 AM IST
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