- CFA Exams
- CFA Level I Exam
- Topic 8. Alternative Investments
- Learning Module 1. Alternative Investment Features, Methods, and Structures
- Subject 3. Investment and Compensation Structures
CFA Practice Question
A hedge fund manager is required to achieve a minimum investment performance before he may receive any incentive allocation. This is called:
B. Hurdle rate.
C. Lock up rate.
A. High water mark.
B. Hurdle rate.
C. Lock up rate.
Correct Answer: B
Hurdle rates establish a floor that the hedge fund managers must exceed to obtain the incentive allocation or performance-based fee. The underlying concept is that an investor could keep its funds in tax-exempt bonds and earn a safe, tax-free return. The investor demands that the incentive allocation be calculated only if the manager makes at least that rate - a hurdle rate.
A high water mark means that the manager will only receive performance fees, on that particular pool of invested money, when its value is greater than its previous greatest value. Should the investment drop in value then the manager must bring it back above the previous greatest value before they can receive performance fees again.
User Contributed Comments 4
| User | Comment |
|---|---|
| johntan1979 | High-water mark definition: The highest peak in value that an investment fund/account has reached The high-water mark ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus. |
| lockwoju | Perhaps revise the gender biased "he" to the gender neutral "the fund manager". |
| ashish100 | Perhaps get some reading glasses @lockwoju #fail |
| 923029 | Does this exclude new money coming into the fund? |