Do Investors Require Justifiable Hurdle Rate When It Comes To Investing Into A Hedge Fund?
Will Hurdle Rate Eliminate Pressure on High Incentives Fees?
After studying this topic to some extent, I found out that investors think of higher returns, but do neglect the fact that money managers require their own justifiable rate of returns to do their work well. At the same time, funds like ETFs lower down the management and incentive fees, so smaller funds face difficulties with covering day to day expenses.
In case a fund would propose a hurdle rate to attract more investors, the management might require higher fees in exchange for the fixed ROI on capital.
In my view, S&P500 three-four year average can provide a hint on the size of the hurdle rate.
Investing in S&P500 index has negative returns too.
So, the rate of the hurdle rate can be somewhat in between from 5-10%. Investors would seek opportunities that can provide higher returns on their capital than bank deposits do.
The next question is that who can survive 5 to 10% hurdle rate and still make money managing investor’s assets? Can this benchmark apply for international funds as well?
I think that competition would in this case destroy ineffective fund managers and provide more wealth to investors. Funds of funds maight become obsolete.
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