# Hard vs Soft Hedge Fund Hurdle Rates | Hedge Fund Fees

Hurdle rates specify that a hedge fund will collect certain fees only if they meet or exceed the hurdle rate The two types of hurdle rates are hard and soft.

A hard hurdle rate means that fees are only charged on the excess return above that rate.

A soft hurdle rate means that fees are charged on the entirety of the return but only if the hurdle rate is met or exceeded.

For example, suppose a hedge fund charges a 50% performance fee with a hurdle rate of 10%. The hedge fund starts the year with \$1 million and at year-end, the fund has generated a return of 25%.

What is the total performance fee paid if the fund has a hard hurdle rate?

Beginning assets: \$1,000,000

Value after 10% hurdle rate return: \$1,000,000 *1.1 = \$1,100,000

Value after actual 25% reutrn: \$1,000,000 *1.25 = \$1,250,000

Excess return above hurdle rate: \$1,250,000 - \$1,100,000 = \$150,000

50% performance fee with hard hurdle = \$150,000*.5 = \$75,000

What is the total performance fee paid if the fund has a soft hurdle rate?

Beginning assets: \$1,000,000

Value after 10% hurdle rate return: \$1,000,000 *1.1 = \$1,100,000

Meets or exceeds soft hurdle rate? Yes

Value after actual 25% reutrn: \$1,000,000 *1.25 = \$1,250,000

Total return in dollars: \$1,250,00 - \$1,000,000 = \$250,000

50% performance fee with soft hurdle = \$250000 *.5 = \$125,000

### The Impact of Management Fees

Management fees are charged regardless of fund performance and are typically a percentage of assets under management. Performance fees are either calculated independent of management fees or net of management fees.

If performance fee independent of management fee: Simply do all calculations as shown in the example above. No adjustment is necessary.

If performance fees are calculated net of the management fee you need to reduce the total return amount by the management fee before calculating performance fees.

What is the total performance fee paid if the fund has a hard hurdle rate net of 1% management fee?

Beginning assets: \$1,000,000

Value after 10% hurdle rate return: \$1,000,000 *1.1 = \$1,100,000

Value after actual 25% reutrn: \$1,000,000 *1.25 = \$1,250,000

Management fee: \$1,250,000*.01= \$12,500

Excess return above hurdle net of management fees: \$1,250,000 - \$1,100,000 - \$12,500 = \$137,500

50% performance fee with hard hurdle = \$137,500*.5 = \$68,750

What is the total performance fee paid if the fund has a soft hurdle rate net of 1% management fee?

Meets or exceeds soft hurdle rate? Yes

Value after actual 25% reutrn: \$1,000,000 *1.25 = \$1,250,000

Management fee: \$1,250,000*.01= \$12,500

Total return in dollars net of management fee: \$1,250,00 - \$1,000,000 - \$12,500 = \$237,500

50% performance fee with soft hurdle = \$237,500 *.5 = \$118,750