Hard Hurdle, Soft Hurdle,
and the Catch-Up Clause
How the same fund return produces three different GP payouts — and why all three structures agree the moment a fund falls short of its hurdle.
8%
Hurdle Rate
20%
Incentive Fee
18.0%
Fund Return ↓ adjustable
📅 2026 ⏱ 8 min read 📊 Live calculator
The Building Blocks
Five terms carry this entire topic. If you already know them, skip straight to the calculator below.
GP
The General Partner — the fund manager running the strategy.
LP
The Limited Partner — the investor who committed the capital.
Hurdle Rate
The minimum return the fund must clear before any incentive fee applies.
Incentive Fee (Carry)
The GP's performance-based share of profit — 20% in this example.
Catch-Up Clause
A clause giving the GP 100% of the next tranche until its fee reaches a full 20% carry on the whole return.
The Basic Split
Before any hurdle enters the picture, an incentive fee simply means the GP and LP split fund profit 20/80. Everything below is about what base that 20% applies to, and when it applies at all.
GP 20%
LP 80%
The three structures below all share this 20/80 split — they just differ in which portion of the return the 20% is applied to, and whether the LP gets a guaranteed floor first.
Live Fee Calculator
Drag the slider to any fund return from 0% to 25% and watch all three structures recalculate. Or jump to one of the three preset scenarios.
Fund Return
18.0%
0% Hurdle: 8% 25%
↓ Below Hurdle (5%)
= Right At Hurdle (8%)
↑ Above Hurdle (18%)
Bar colours: Green = LP's protected hurdle tranche  ·  Gold = GP's incentive fee  ·  Navy = LP's remaining share. Dashed line marks the 8% hurdle.
1
Hard Hurdle
GP only earns a fee on the return above the hurdle. The first 8% belongs entirely to the LP — always, unconditionally.
Fee = 20% × (18.0% − 8%) = 2.00%
GP Total
2.00%
LP Total
16.00%
2
Soft Hurdle
The hurdle is only a trigger. Once cleared, the GP earns its fee on the entire return — including the first 8% below the hurdle.
Fee = 20% × 18.0% = 3.60%
GP Total
3.60%
LP Total
14.40%
3
Hard Hurdle + Catch-Up
The compromise
LP keeps its full hurdle floor first. Then the GP takes 100% of profits until its total fee matches what a soft hurdle would have paid. After that, profits split normally 20/80.
LP hurdle: 8.00% → GP catch-up: 2.00%
Remaining 8.00% → GP 1.60% / LP 6.40%
GP Total
3.60%
LP Total
14.40%
Two Regimes, One Rule
Set the slider in Part 2 to any return below 8% and you will notice all three GP totals collapse to the same number: zero. That is not a coincidence — it is the entire purpose of a hurdle rate.
Below the Hurdle
Structure doesn't matter. Hard, soft, and catch-up all pay the GP 0% incentive fee — the LP keeps the entire return. This is the hurdle protecting LP downside, regardless of how the fee is written.
Above the Hurdle
Structure matters a great deal. Hard hurdle gives the GP the least. Soft hurdle gives the most, immediately. Catch-up starts near hard hurdle's outcome and — once the fund clears roughly 10% in this example — converges exactly to the soft hurdle number.
Structure Fee Formula (above hurdle) Applies To LP Floor Guarantee
Hard Hurdle 20% × (Return − 8%) Only the excess above hurdle ✓ Yes — first 8% always LP's
Soft Hurdle 20% × Return Entire return, once triggered ✗ No — fee eats into the 8% too
Hard + Catch-Up 100% to GP until caught up, then 20/80 Excess above hurdle, front-loaded to GP ✓ Yes — first 8% always LP's
The catch-up clause is a negotiated compromise. It gives the LP the downside protection of a hard hurdle — a guaranteed floor no matter what — while still letting the GP earn a full 20% carry on the whole return once the fund has cleared that hurdle by enough. That is why catch-up structures are the most commonly negotiated middle ground in fund documents: LPs keep their floor, GPs keep their economics.
Test Your Understanding
Click each question to reveal the answer.
1. A fund returns 6% against an 8% hurdle with a 20% incentive fee. What does the GP earn — under any of the three structures?
2. Under a soft hurdle, does the GP ever earn a fee on the first 8% of return?
3. If catch-up eventually pays the GP the same total fee as a soft hurdle, why would an LP prefer catch-up?
RUQQI KEY TAKEAWAYS — PERFORMANCE FEE STRUCTURES
  • Below the hurdle — all three structures give the GP zero. No exceptions.
  • Hard hurdle: fee = 20% × (Return − Hurdle). LP always keeps the first 8%.
  • Soft hurdle: hurdle is just a trigger. Once cleared, fee = 20% × entire return. No LP floor guaranteed.
  • Catch-up: LP gets hurdle first. Then GP takes 100% until its total fee = 20% of the whole return. Then 20/80 split on the rest.
  • When fully caught up, catch-up = soft hurdle in GP economics, but with LP's floor still intact. That is the whole point of the compromise.