With the publication of “An Open Letter to the Hedge Fund Industry” (Letter), the issue of cash hurdles in incentive fee arrangements for private funds has gotten wider attention. The signatories to the Letter, 29 of the world’s largest institutional investors and pension funds, along with three investment consulting firms, addressed what they see as a fundamental misalignment between the interests of investors and fund managers, which, in their view, permits the managers to take home outsized fees that bear little or no relationship to how the funds have actually performed and how much alpha managers have delivered to investors. As a remedy, the Letter calls for the incorporation of cash hurdles into performance fee arrangements across the industry. This article, the first in a two-part series, explains what cash hurdles are and summarizes the advantages and challenges posed by their implementation. The second article will delve into the operational logistics of what needs to happen when a fund manager decides to adopt cash hurdles and offer key takeaways. See “Established Hedge Fund Manager Study Examines Strategies, Fees, Liquidity and Structures” (Nov. 21, 2024).