GlossaryFund economics

What is a high-water mark?

A high-water mark is the highest value an investor’s stake has reached, and a manager earns no performance fee until the stake is back above it.

In practice

High-water marks are standard in hedge funds, and are usually tracked for each investor because people invest at different times. Some funds add a hurdle, so the fee applies only above a minimum return as well. A deep drawdown can leave a manager far below its mark, which can make it harder to keep staff.

An example

Round numbers, not a real fund

Say a $100 stake falls to $80, then climbs back to $100. The manager earns no performance fee on that recovery, only on gains above $100.

Why it matters

It stops investors paying twice for the same gains, and after a large loss it can leave a manager with no performance fee for a long time.

Video

41 seconds, with sound

A definition, not advice; where usage varies the entry says so.

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Related terms

Carried interestCarried interest is the share of a fund’s profits, typically 20%, that the manager earns after investors get their money back and clear the preferred return.
Hurdle rateA hurdle rate, or preferred return, is the minimum yearly return, often 8%, that investors must receive before the manager can start earning carried interest.
Side pocketA side pocket separates hard-to-value or illiquid assets from the rest of a fund, typically a hedge fund, so redemptions do not force a sale of them.
ClawbackA clawback makes a manager return carried interest it was paid early, if later losses mean it received more than its agreed share of the fund’s total profit.

The terms, in the news each morning.

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