Lesson 8 of 10 · All lessons in this module
- Why appraisal is harder: the life cycle and the J-curveVideo lesson
- Measuring returns: IRR versus MOICVideo lesson
- Leverage: magnifying gains and losses
- Valuation: fair value levels and smoothed returns
- Fees, custom terms and redemption provisions
- Hurdle rates, catch-up, waterfalls and clawbackVideo lesson
- High-water marks, investor timing and either/or feesVideo lesson
- Integrated case: hurdle rate and high-water mark in one fee
- Integrated case: three investors, one fund, four years
- Funds of funds, benchmarks and index biases
Lesson 8 of 10 · 16 min
Integrated case: hurdle rate and high-water mark in one fee
When a fund has both a hurdle and a high-water mark, the incentive fee is due only on the value, after the management fee, that clears the high-water mark grown at the hurdle rate; this case runs four years of it.
In short
- Read the terms first: what the management fee is charged on, whether the incentive fee is net of the management fee, whether the hurdle is hard or soft, and where the high-water mark starts.
- Each year: gross value → management fee → value after the fee → compare with the fee trigger → incentive fee → ending capital and new mark.
- A fund can end the year above its mark before fees and still owe nothing: the test is on the value after the management fee.
- With a hard hurdle on top of a mark, the hurdle is grown from the mark, not from this year's opening value; a soft hurdle is only a pass/fail gate.
- The investor's return is measured on the opening capital of that year, even when that capital sits below the mark.
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