A fund that requires investment returns to exceed a specified benchmark before fees are taken is known for applying which principle?

The principle in question refers to the concept of a hurdle rate. A hurdle rate establishes the minimum return that an investment fund must achieve before it can charge performance fees to its investors. This mechanism ensures that fund managers must generate substantial returns, exceeding the specified benchmark, before being compensated for their performance through fees.

This practice aligns the interests of the fund managers with those of the investors because it incentivizes managers to strive for higher returns. If a fund fails to meet the hurdle rate, the performance fees are not charged, which protects investors' interests, as they are not paying fees for underperformance.

In contrast, other concepts like high-water marks pertain to ensuring that managers do not earn performance fees for recovering losses unless they surpass their previous best performance, while performance fees may be charged based on absolute returns without a benchmark, and liquidity provision relates to the ease with which an investment can be converted to cash, not performance measurement. The focus on surpassing a specific benchmark before incurring fees distinctly defines the principle of a hurdle rate.