What is a Hurdle Rate?

A hurdle rate is the minimum return an investment must be expected to earn before it's worth doing — the bar it has to clear. Companies use it to screen projects: anything below the bar gets rejected. In investment funds it's also the minimum yearly return the fund must earn for investors before the managers may take their share of profits.

The screening use first: before funding anything, a company sets a hurdle rate — usually its cost of raising money plus extra for risk — and a project expected to return 12% against a 9% hurdle clears, while one at 7% is rejected because the money earns more elsewhere. Riskier projects get higher bars. The fund use: investors hand money to managers, who earn a small flat fee either way plus the real prize — typically 20% of profits, called carried interest — which only unlocks above the hurdle, commonly around 8%. Many contracts add a "catch-up" clause: once the hurdle is cleared, the 20% applies to more of the total profit, not just the part above 8%. Both uses share one logic: the hurdle marks what the money could earn anyway. Returns below that line don't count as achievement.

You're selling your house, and an agent claims she can beat any price, so you set the deal up as a hurdle: the house is worth $500,000 with a yard sign alone, and she earns 20% only on whatever she gets above that. Sell at $500k after six months of open houses and she gets zero; sell at $560k and she earns 20% of the extra $60k. Her paycheck only exists in the zone where she beat the do-nothing option.