High Water Mark

Can someone please explain what the “high water mark” is, and what it means? Many thanks

It’s for hedge funds and other performance based managers. Here’s an example: You give $1MM to a hedge fund with a water mark provision on Jan 1, 2010. The fund does well that year and returns a net 30% to you after fees. In 2011, the fund doesn’t do so well and loses -15%. Because the manager’s returns dropped the fund below the high water mark they cannot receive the performance part of their fees. You now have $1.105MM. Let’s say in 2012 the fund does well again and returns 15% bringing your account value to $1.27MM. Even though the manager may have performed well they cannot take a performance fee because the fund and your account is still below the “high water mark”. Essentially if a fund manager wants to receive the performance fee the fund’s NAV must be above the high water mark. If you’ve ever watched the tide come in and out of a harbor you would notice that the walls are wet up to a certain point where the water once touched. The high water mark, where the term came from, is the highest point once touched by the water. If a manager wants to receive the performance fee the water must be above that point. Think of the water as NAV.

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A NAV that must be exceeded for a manager to get paid his commission (carried interest). With carried interest - if for some reason, the NAV goes down for a year, it has to get where it got to (in the past) for the GP to earn their carried interest.

Better explained by chuck!

thanks for the explanations