BackWhat is hurdle rate?
The hurdle rate is the minimum acceptable return on investment (ROI) in a project, considering the risks associated with that project
PremiumThe hurdle rate is the minimum acceptable return on investment (ROI) in a project, considering the risks associated with that project. The higher the risk, the higher will be the hurdle rate.
If the minimum acceptable ROI for a project is 15%, it means that at 15%, you can meet all the costs of the project and earn a reasonable premium on your investment for the risks you take with the project. In this case, 15% becomes your hurdle rate for the project. If the potential return from the project is less than the hurdle rate, you can decide not to invest in the project.
In the case of asset management, it implies the minimum rate of return mandated by an investor or a fund manager. The latter becomes eligible to collect the asset management fee only on beating the hurdle rate. For example, if fund managers promise a hurdle rate of 10%, they can collect the fee only if the return generated is more than 10%. The terms could also be arranged in such a way that the management fee will be paid only on the excess return beyond 10%.
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