Hurdle rate is applied on beginning value of fund then why is the hurdle rate applied on high water mark. Is that so ki high water mark amount has become the new virtually invested capital of the LPs
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High watermark provision is to ensure that investors do not pay the same incentive fees twice. So, if high watermark is provided, we apply the incentive fees against high water mark. Also, hurdle rate, if present alone is applied to ending value of fund and not beginning value. If both hurdle rate and high watermark are given, we will use the high watermark as a beginning value and multiple it with hurdle rate to get the new hurdle rate value and use that to compare against ending value of fund to get incentive fees.
Just adding to the above answer, here the catch in the question was to apply the hurdle rate on the high watermarked amount and not the beginning value as we would eventually not pay any fee on the same profit twice.
Hope this helps !