What Is a High‑Water Mark &
Why Does It Matter to Your Investors?

What Is a High-Water Mark & Why Does it Matter to your Investors? ----------------------------- When investing in a hedge fund, investors pay two types of fees to the manager, 1) A management fee which is typically 1-2% on the investor's net capital account value. 2) And a performance fee which is typically 20% of the fund’s profits. As the name implies, performance fees are paid based on the performance of the fund, which is usually based on a high-water mark. A high-water mark is the highest level of value reached by an investment account or portfolio. Let’s take a simple example: Assume the investor places $500,000 into a fund, and the fund earns a 15% return. The investment is worth $575,000, becoming the new high-water mark. The investor owes a 20% performance fee on the $75,000 gains, which equates to $15,000. Now, assume the fund loses 20%. The investor's account drops to $460,000. No performance fees are owed. Assume the fund now earns a profit of 50%, raising the account value from $460,000 to $690,000. With a high-water mark in place, all gains from $460,000 to $575,000 are disregarded, but gains above the high-water mark are subject to performance fees, owing the manager $23,000. The new high-water mark is set at $690,000. ----------------------------- Advantages of High-Water Marks ----------------------------- High-water marks keep the manager motivated to outperform their past. They also protect investors from paying a fee for poor performance, and from paying a fee repeatedly every time the fund earns a profit. ----------------------------- Disadvantages of High-Water Marks ----------------------------- Since managers typically earn performance fees by surpassing their previous high-water mark, they may take unnecessary risks. For this reason, it is prudent to invest with managers who are limited partners and invest their own money into the fund. They are usually more likely to have an alignment of interest with investors, which helps mitigate excessive risk-taking. These are the types of managers we seek to source for our platform.