A hurdle rate is the minimum acceptable rate of return that an investment must achieve before a fund manager, private equity firm, or Portfolio Management Service (PMS) provider is entitled to charge performance fees (also called profit-sharing or carried interest). Below the hurdle rate, the manager earns only the fixed management fee — no performance-linked compensation is triggered. Above the hurdle rate, the manager receives a percentage of the returns exceeding the threshold — aligning the manager's incentives with delivering superior investor outcomes. In India, SEBI's PMS regulations and AIF regulations govern performance fee structures. A typical PMS in India may set a hurdle rate of 10% per annum — meaning the manager earns a performance fee (often 10% to 20% of profits) only on returns generated above 10%. Hurdle rates serve as an important investor protection mechanism by ensuring that managers are rewarded for genuine value creation above a minimum acceptable threshold rather than simply for market beta returns that any passive index fund could have delivered. High hurdle rates align manager incentives most closely with long-term wealth creation for investors.
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