Hi,
Can someone please let me know if I understood the difference between soft and hard hurdle rate correctly.
For Example : Investment = $1000, Return = $100, Hurdle Rate = 5%, Performance Fee = 20%
Hard Hurdle Rate = 1000*0.05 = 50 * 0.2 = $10
Soft Hurdle Rate = 100*0.2 = $20
Let me change your return to $110; using $100 gives us two 5% numbers, and it’s easy to confuse them.
The hurdle rate is 5% and the return is 11%, which is 6% above the hurdle rate.
If 5% is a hard hurdle rate, the performance fee is paid only on the excess return above the hurdle rate: 20\% \times \$60 = \$12.
If 5% is a soft hurdle rate, the performance fee is paid on the entire return (when it exceeds the hurdle rate): 20\% \times \$110 = \$22.