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