AIMA Global Investor Board Insights: Cash Hurdles & Alignment of Interests

Published: 02 July 2024

  • Investors are overwhelmingly supportive of cash hurdles in hedge fund strategies to incentivize managers to align performance fees with skill-based return while maintaining appropriate risk levels.
  • While AIMA’s In Sync Research shows 55% of managers with more than $1B in AUM already have hurdles in place (as do 41% of managers with less than $1B in AUM), there is clearly investor desire for further hurdle integration as evidenced by this recent open letter to the hedge fund industry.
  • Investors are willing to pay for good, alpha-driven performance, though the shape and style of fees need to be aligned with transparency. Management fees should not be a profit centre.
  • Investors commended managers who come to fee negotiations with an open mindset, especially as investors may value terms differently (liquidity, minimums, etc.) and negotiation power on both sides will vary depending on size and stage.
  • Hurdles can be customized to match the manager and fund objective (ie. perhaps 75% of cash rate makes more sense than 100% cash rate) and feature payout caps if necessary to avoid excessive risk-taking.
  • In countries like Brazil where rates have been higher historically, managers are accustomed to cash hurdles for international USD-denominated funds.
  • The need for hurdles is also present in private credit, especially where borrowing is not already tied to cash rates. It is important that hurdles are adjusted to align with current rates. Hard hurdles, split carry and other compensation structures in other private markets are welcome vs a simple preferred return.