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What Is Hurdle Rate in PMS? A Clear Guide for Investors
- Ripradaman R
- 6 days ago
- 2 min read
Introduction
Hurdle rate is a key concept in Portfolio Management Services (PMS) fees.
It defines the minimum return a fund manager must generate before charging performance fees.
Understanding this metric helps investors evaluate cost structures and manager incentives.
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What Is a Hurdle Rate in PMS
A hurdle rate is the minimum benchmark return set in a PMS agreement.
The portfolio manager earns performance fees only if returns exceed this threshold.
Acts as a performance benchmark
Aligns manager and investor interests
Common in discretionary and non-discretionary PMS
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Why Hurdle Rate Matters for Investors
Hurdle rates protect investors from paying fees for mediocre performance.
Ensures manager earns incentive only for excess returns
Encourages active alpha generation
Reduces conflict of interest
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Types of Hurdle Rate Structures
Fixed Hurdle Rate
Example: 8% or 10% annual return
Performance fee charged only above this level
Benchmark-Linked Hurdle RateRisks and Limitations of Hurdle Rates
Hurdle rates do not guarantee returns.
Market volatility can impact performance
Managers may take higher risk to beat hurdle
Fee structures vary widely across PMS providers
Linked to Nifty, Sensex, or debt index
Performance fee charged above benchmark returns
Hurdle Rate vs High Watermark
Hurdle rate and high watermark are often used together but are different.
Hurdle Rate: Minimum return threshold
High Watermark: Ensures fees are charged only on new profits
This prevents double charging on recovered losses.
How Performance Fees Are Calculated
Example:
Investment: ₹1 crore
Hurdle rate: 10%
Portfolio return: 18%
Performance fee: 20% of excess return (8%)
Manager earns fee only on 8%, not full 18%.
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Typical PMS Fee Structure
Most PMS offerings charge two types of fees:
Management Fee: 1–2.5% annually
Performance Fee: 10–20% above hurdle rate
Risks and Limitations of Hurdle Rates
Hurdle rates do not guarantee returns.
Market volatility can impact performance
Managers may take higher risk to beat hurdle
Fee structures vary widely across PMS providers
Conclusion
Hurdle rate is a critical feature in PMS fee structures.
It ensures investors pay performance fees only for genuine alpha.
Understanding hurdle rate, high watermark, and fee mechanics helps investors make informed PMS decisions.
FAQ
Q1.What is the typical hurdle rate in PMS in India?
Most PMS hurdle rates range between 8% and 12% annually.
Q2. Is hurdle rate mandatory in PMS?
No. Some PMS schemes charge performance fees without a hurdle rate.
Q3. What is the difference between hurdle rate and benchmark?
Hurdle rate is a fixed threshold, while benchmark is a market index reference.
Q4. Can PMS charge fees if returns are negative?
Management fees may still apply, but performance fees do not apply below hurdle rate.
Q5. Is hurdle rate good for investors?
Yes. It aligns manager incentives with investor returns.
Citations
SEBI Portfolio Managers Regulations
Association of Portfolio Managers in India (APMI)
Morningstar India PMS Research
CFA Institute Investment Fee Structures
Bloomberg Professional Services
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