Definition of high water mark

A high water mark is used in investment funds to ensure that investors do not have to pay performance fees for bad or mediocre performance. High water marks have been particularly important for investors in hedge funds which have traditionally operated on a steep "2 and 20" fee structure (which means they charge 2 per cent of assets invested and 20 per cent of any appreciation in value of the funds). A high water mark ensures that if the net asset value of the fund falls in one investment period (a month, a quarter, a year – whichever is defined in the funds prospectus) that the performance fee can only ever be charged on any outperformance above the highest the fund had ever reached in a previous investment period. So if the fund falls 50 per cent to, say, $1,500 from a high of $3,000 in one investment period and rises 100 per cent to $3,000 in the next that no performance fee is charged.

 

high water mark in the news

In February 2014 a report looked at the return to the good old days for hedge funds which were said to be more focused on returns again and less interested in managing risk. One hedge fund was reported to be charging a 1.5 per cent management fee and a 20 per cent performance fee with a high water mark, but the manager said a large investor migh persuade him to waive some of the management fee.

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