What is a high-water mark? A hedge fund manager's performance fee usually counts only gains above the fund's previous peak. After a loss, winning the money back earns no bonus. It matters to investors because it stops them being charged twice for the same ground.
What the film says
In hedge funds, winning back a loss can earn the manager no bonus. That's the high-water mark. Follow one dollar to see it. Your dollar goes in and gains fifty cents. The manager's bonus, the performance fee, is twenty percent of the gain. That's ten cents. You keep forty cents. That height is now the high-water mark. Then markets fall. All forty cents are gone. Your dollar climbs those forty cents back. The bonus on that climb is zero. It's only back where it was. Then it gains twenty cents more. That's new ground, above the mark. The bonus is four cents, and the mark moves up. So why do investors care? Without a mark, that sixty-cent climb would cost twelve cents, not four. You pay for new ground once. Not the same ground twice. IN HEDGE FUNDS,
A simple example with round numbers, not advice. Terms vary by fund.
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