What is: High Water Mark

What is High Water Mark?

High Water Mark is a term used in the trading industry to refer to the highest peak in value that an investment fund or account has reached. It is used to calculate performance fees for fund managers, as they are typically entitled to a percentage of the profits made by the fund.

How is High Water Mark Calculated?

High Water Mark is calculated by taking the highest value that an investment fund or account has reached and subtracting any losses that have occurred since that peak. This ensures that fund managers are only entitled to performance fees when the fund has surpassed its previous peak value.

Why is High Water Mark Important?

High Water Mark is important because it aligns the interests of fund managers with those of the investors. By only allowing performance fees to be charged when the fund has exceeded its previous peak value, fund managers are incentivized to make profitable investments and avoid unnecessary risks.

How Does High Water Mark Impact Investors?

For investors, High Water Mark provides a level of protection against paying performance fees on losses. If the fund’s value drops below the high water mark, no performance fees are charged until the fund surpasses its previous peak value.

Are There Any Drawbacks to High Water Mark?

One potential drawback of High Water Mark is that it can create a disincentive for fund managers to take risks in order to generate higher returns. Some critics argue that this may lead to a more conservative investment approach.

How Can Investors Benefit from High Water Mark?

Investors can benefit from High Water Mark by ensuring that fund managers are motivated to make profitable investments and avoid unnecessary risks. By aligning the interests of fund managers with those of the investors, High Water Mark can help to protect investors’ capital.

Conclusion

In conclusion, High Water Mark is an important concept in the trading industry that helps to align the interests of fund managers with those of the investors. By only allowing performance fees to be charged when the fund has exceeded its previous peak value, High Water Mark provides a level of protection for investors against paying fees on losses.