Performance Fee & Hurdle Rate Calculator
Calculation Summary
Gross Investment Return:
Hurdle Threshold (Amount):
Profit Subject to Fee:
Performance Fee Charged:
Net Value to Investor:
Understanding Performance Fees and Hurdle Rates
In the world of hedge funds and private equity, a performance fee is a share of the profits that an investment manager receives as compensation. However, to protect investors, many funds implement a Hurdle Rate.
A hurdle rate is the minimum rate of return that the fund must achieve before the manager is entitled to collect any performance fees. This calculator uses the "Hard Hurdle" logic, where fees are only calculated on the returns that exceed the hurdle threshold.
How the Calculation Works
To calculate the performance fee manually or in Excel, follow these steps:
- Step 1: Calculate the Hurdle Amount. (Initial Assets × [1 + Hurdle Rate])
- Step 2: Determine the excess profit. (Ending Assets – Hurdle Amount)
- Step 3: If the excess is positive, multiply it by the Performance Fee Rate.
- Step 4: If the excess is negative, no performance fee is due.
Excel Formula Example
If you are building this in Excel, you can use the following logic assuming your values are in cells A2 through D2:
| Component | Excel Formula Logic |
|---|---|
| Performance Fee | =MAX(0, (Ending_Val - (Starting_Val * (1 + Hurdle_Rate))) * Fee_Rate) |
| Net Return | =(Ending_Val - Performance_Fee) |
Example Scenario
Imagine an investment of 1,000,000. The fund ends the year at 1,150,000 (a 15% gross return). If there is a 5% hurdle rate and a 20% performance fee:
- The hurdle amount is 1,050,000 (1,000,000 + 5%).
- The profit above the hurdle is 100,000 (1,150,000 – 1,050,000).
- The performance fee is 20,000 (20% of 100,000).
- The investor's net ending value is 1,130,000.