Hurdle Rate

Hurdle rate refers to the minimum rate of return that an investment must achieve before a fund manager or investment advisor is entitled to receive performance-based compensation, such as carried interest. In the context of family offices and alternative investments, the hurdle rate ensures alignment of interests between the family office and the manager by prioritizing the achievement of a baseline return for the family’s capital. It is typically expressed as a percentage and serves as a benchmark to evaluate the success of an investment strategy. Setting an appropriate hurdle rate is critical for managing risk and ensuring fair compensation structures in private equity, hedge funds, and other alternative investments.