A threshold level for a hedge fund‘s performance which maintains that the fund management receives the fees only if the fund’s annual return exceeds it (this level is also known as a hurdle rate or a benchmark rate). This rate could be a predetermined fixed percentage or some market linked rate such as LIBOR or a treasury yield.
The hurdle rate is a minimum base rate beyond which performance fees accrue to the manager. For investors, it provides an additional layer of protection, especially to new investors who are usually satisfied with the fund exceeding the high-water mark (HWM) while providing a low relative return.
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