Hurdle rate vs high level: what is the difference?

Answer:

The break-even point and the high water mark two types of indicators that hedge funds may be set as requirements to collect the incentives or remuneration from investors.

High watermark is the highest value that an investment Fund or account has ever reached. And the break-even point is the minimum amount of profit or returns of a hedge Fund must earn before he can collect the reward.

For example, the Fund may establish the rate 5% barrier, which allowed her to obtain compensation only for those periods when income exceeds this amount. If the Fund also has a high watermark, he can not collect incentive fees if the Fund value exceeds the mark, and returns above the breakeven point.

When used in capital budgeting, break-even point has a slightly different meaning: it is the minimum that the company or Manager expects to earn when investing in the project. The breakeven point can also refer to low profitability on investment, which would make it an acceptable risk for the investor

(see how can I calculate the break-even point in Excel?).

Background on the charges

A hedge Fund is a business partnership or some other structure that pools and actively manages the investment. The formula, known as the 2/20 hedge funds, which typically charge a management fee of 1% to 2% of the net value of the Fund’s assets (NAV) and reward 20% of the profits of the Fund.

The management fee is always paid by the investor, regardless of income. However, various structures can be used in the calculation of income for purposes of calculating incentive. Under one type of structure, profit can be defined as the increase in net asset value. In addition, the profit can be increase in NAV with the adjustment to the management fee.

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