high water mark
The highest peak in value that a fund has reached, which must be exceeded before performance fees can be charged again after losses.
Example
“After losing 20%, the hedge fund had to recover fully to its previous peak high water mark before charging performance fees.”
Memory Tip
HIGH WATER MARK = the previous peak. Must exceed it before charging performance fees again.
Why It Matters
Understanding the high water mark is crucial for investors because it directly affects the fees they pay to fund managers. If a fund loses value, managers cannot charge performance fees until the fund recovers to its previous peak, which protects investors from paying extra fees during recovery periods.
Common Misconception
Many people incorrectly believe that a high water mark prevents a fund manager from ever charging performance fees again after losses occur. In reality, the manager can resume charging performance fees as soon as the fund value exceeds the previous high water mark, even if it takes years to recover.
In Practice
Suppose a mutual fund reaches a peak value of 100 dollars per share in January 2022, then drops to 80 dollars per share by December 2022. The high water mark becomes 100 dollars, and the manager cannot charge performance fees on gains until the fund exceeds 100 dollars per share again. If the fund recovers to 105 dollars per share in 2023, the manager can then charge performance fees on the 5 dollar gain above the high water mark.
Etymology
HIGH WATER MARK = the highest level water has reached. A fund's highest value must be exceeded before new performance fees apply.
Common Misspellings
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See Also
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