What is High Water Mark????

CFA Level III
#1

In simple terms and numbers please…i’m seeing different explanations of this concept and confused as chit. Please help your brother out.

#2

if a manager takes a portfolio assets from 100 to 110, and then back down to 100, he can’t get performance fees by taking it back up to 110, he would only get fees above 110. so 110 would be the high water mark prevents managers from double dipping for reaching the same level

#3

so let’s say you run a hedge fund. year 1 your fund is up 10% with a market value of $110mm. for simplicity, assume no inflows/outflows. year 2, your fund is down to a mkt value of $100mm. in year 3, your fund would have to go above $110, the high water mark, before you earn any incentive fee on profits.

#4

wow. we used identical examples.

#5

little creepy we used the exact same numbers.

#6

Let’s say when you invest in a fund with an NAV of 100. After the first year, the NAV is 90, so you’re down 10%. After the second year, the NAV is back up to 100, so that year you’re up 11%. However, the fund manager doesn’t get to take performance fees in the second year, because he/she lost money in the first year, and you’re no better off than when you started. They would only receive performance fees once the NAV goes above the point at which you initially invested (plus whatever the hurdle rate is). Does that help?

#7

punch buggy no puchback

#8

ok what confused me was the CFAI definition of HWM…enjoy: “A high water mark is a provision requiring the portfolio manager to have cumulatively generated outperformance since the last performance-based fee was paid” (it doesn’t mention $$$) Example: ABC inv charger fee on its outper in 2001 2002 firm underper its benchmark and collect only base fee in 2003 it will need to outper its benchmark by amount greater than the 2002 underperformance to collect a performance-based fee" i’m not saying you guys are wrong, actually i was thinkin just like you before i saw this. Is CFAI making this up or just saying the same things you guys just did??? double help!

#9

double post delete

#10

yes, it is saying the exact same thing in 2003 it will need to outper its benchmark by amount greater than the 2002 underperformance to collect a performance-based fee = needs to go back above the previous high to start collecting performance-based fees again

#11

why are you confused. they clearly state cumulative performance.so basically the year the manager gets paid a performance fee becomes the new benchmark- lets call it year X. that is he will only get another performance fee if /when the fund is bigger in value than at the end of year X

#12

ok you guys are right, a brief brainfck moment like many others happened during the day. i thought CFAI meant a benchmark like an index. too much CFAI bashing going on these days i guess. (sorry CFAI!) and thanks yall!