HEDGE FUNDS

Private investment fund that utilizes sophisticated strategies in both international and domestic market. Designed to offset losses during a market downturn and generate higher returns. Areopen to a limited number of investors and require a very largeinitialminimum investment.

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HEDGE FUND FEES

Feesis calculated as a percentage of the fund'snet asset valueand typically range from 1% to 4% per annum. It is management fees for hedge funds are designed to cover the operating costs of the manager. Performance Feesis typically 20% of the fund's profits during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.
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Management

Performance fees includeswater markmeans that the performance fee only applies to net profits.
Hurdle High

a fee is only paid on the fund's performance in excess of a benchmark rate (e.g.LIBOR) or a fixed percentage.

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HURDLE
The

minimum return necessary for a fund manager to start collecting incentive fees. The hurdle is usually tied to a benchmark rate such as Libor. If, for example, the manager sets a hurdle rate equal to 5%, and the fund returns 15%, incentive fees would only apply to the 10% above the hurdle rate. Hurdle rates are also used to guarantee that the hedge fund achieves a minimum investment performance before any incentive allocation.
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Conti.
It

establishes a floor that the investment adviser must exceed to obtain the incentive allocation or performance- based fee. Investor should keep its funds in tax-exempt bonds and earn a safe tax-free return. Investor demands that the incentive allocation be calculated only if the manager makes at least HURDLE rate.

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 The

hard hurdleis calculated on all profits above the hurdle rate.The hard hurdle is the most investor-friendly. soft hurdleis calculated on all profits if the hurdle is achieved.In this instance, in certain situations.The soft hurdle is the least investor-friendly. blended hurdle the blended hurdle is calculated on all profits if the hurdle is achieved; however, if the hurdle rate is achieved, the return to investors cannot dip 4/14/12

How will the rate be calculated?

The

The

Negative Hurdle Rate

The

negative hurdle rate comes into play when the hurdle rate is actually below zero. Say for instance if the S&P is down 10% for the year and the fund returns 0%, the manager would actually earn a 2% performance allocation, even though the fund did not return anything. The negative hurdle rate is rarely done because it is hard to tell investors that the fund lost money and owes a performance allocation.
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Water Mark
It

is to ensure that a manager who has made money for an investor and then loses part of that capital cannot take a performance allocation (or fee) until the loss has been made up. Thus, performance can be taken only on the profits above the high-water mark. Performance is always calculated on the funds economic performance, which includes the net of the yield (dividends, interest) less fees and expenses chargeable to the investor.
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provision serving to ensure that a fund manager only collects incentive fees on the highest net asset value. Example, if the value of an investor's contribution falls to, say, $750,000 from $1 million during the first year, and then rises to $1.25 million during the second year, the manager would only collect incentive fees from that investor on the $250,000 that represented actual profits in year-two.

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High Water Mark Example: An investor gives a hedge fund $500k in 2006 and that investment's value falls to $300k. In 2007 the hedge fund produces 100% returns and that investment is now worth $600k. This individual would only have to pay performance fees on that gain between the $500k and $600k, not the full 100% gain ($300k) for that year.

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