High-water mark.
In plain English
A high-water mark is the highest value an investor's account in a fund has ever reached, and it sets the floor for future performance fees. If the fund loses money, the manager collects no performance fee until the account passes that old peak again. The point is to stop an investor paying twice for the same dollar of gain, once on the way up, again after a loss is recovered. Marks are usually tracked per investor, because people buy in at different times. The management fee normally keeps being charged whether or not the mark is cleared.
01Why it matters
Without this rule, a fund that drops 20 percent and then gains 20 percent back could charge a profit share on the recovery even though the investor is no better off than before.
02The math, step by step
Say an account peaks at $500,000, then falls to $400,000. It later recovers to $520,000. Only the $20,000 above the old $500,000 peak counts as new profit. At a 20 percent performance fee, that is $4,000, not 20 percent of the full $120,000 climb, which would have been $24,000.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A hurdle rate is a minimum return the fund must beat before any performance fee applies at all. A high-water mark only concerns past losses that have to be made back. A fund can have one, both, or neither, and they do different jobs.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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