High-water mark
A level a hedge fund must climb back above before charging an incentive fee again, so the same gains are not charged for twice after a loss.
Where you will meet it
High-water mark appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set out the strategies hedge funds use and how they charge fees
“A high-water mark stops the same gains being charged for twice after a loss, and a hurdle rate withholds the incentive fee until a threshold return is cleared.”
- Set out the three standard ways a performance-based fee can be structured
“The third is a bonus with a high-water mark: the bonus is paid only once the manager has recovered earlier shortfalls, so the client does not pay twice for the same gains.”
- Work out hedge fund fees and explain what they mean
“A high-water mark prevents the manager from charging twice for recovering the same losses: no incentive fee is due until the fund exceeds its previous peak value.”
- Analyse an illustrative performance-based fee schedule and interpret its outcomes
“Take a base fee of 0.4% plus 20% of return above the benchmark, with a high-water mark on cumulative excess return.”
Practise it
Practise high-water mark until it is automatic: questions that explain every wrong option.
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