The Hurdle Rate is a minimum threshold return (e.g., 8% IRR) that an AIF must achieve before the fund manager can take their performance fee, or **carried interest**. ItÕs a key alignment mechanism for investors.
If the fund’s returns fall below the hurdle rate, the manager receives only the management fee, not the carried interest. Once the hurdle is crossed, the manager typically receives a percentage of profits (often 20%). It ensures that managers are rewarded only for delivering superior returns to the investors.
