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CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures

Compared with a soft hurdle rate, a hard hurdle rate in a hedge fund's incentive fee structure most likely results in the manager earning the incentive fee on:

Under a hard hurdle the manager earns the incentive fee only on the portion of the return above the hurdle rate. A soft hurdle differs because, once cleared, the fee applies to the whole return, so the hard hurdle is more favorable to investors.

  1. Athe entire return once the hurdle is exceeded
  2. Bonly the portion of the return above the hurdleCorrect
  3. Cthe return below the hurdle but not above it

Explanation

With a hard hurdle, the fee applies only to returns exceeding the hurdle rate. With a soft hurdle, once the hurdle is cleared the fee is charged on the entire return, including the part below the hurdle.

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