Question

How are hedge fund expenses different from mutual fund expenses? What are hurdle rates and high water marks at a hedge fund? Why are these used?

Answer 1

Hedge fund expenses are different from mutual fund expenses :

Mutual funds expenses are expenses that the investors have to incur who are holding the mutual funds. The expenses include management fees, advisory fees and marketing and distribution expenses.

The expenses in a hedge fund is the management fees and the performance fees. The management fees will be charged on the basis of the assets under management.

Performance fees is charged in case there is an increase in the Net Asset value of the fund.

Hurdle rate :This is the minimum amount of profits that a hedge fun must earn in order to earn an incentive fee.

High water mark: is the highest value that an investment fund has ever attained.

These are used for creating benchmarks for hedge fund performance before any incentive fees is paid.

Hurdle rate is the minimum return a hedge fund must attain before it can collect incentives for the investors. If the hurdle rate is 5%, then the fund must attain this return, before it can receive any return. If the fund has a high water mark provision as well,then it just attain this mark, before any incentive fees is paid to them.