What is a high-water mark in a hedge fund?
Beginners · Video 7 of 12 · 0:44 ·
A high-water mark is the highest value an investor's account has reached after the manager was paid. The manager earns a performance share only on gains above it. If $100,000 grows to $120,000, a 20% share of the gain is $4,000, leaving $116,000 as the new line. If the account then falls and climbs back to $116,000, the manager earns no performance pay on that recovery.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Performance pay is earned only on gains above the high-water mark.
- After each performance payment, the account's value becomes the new mark.
- A recovery back to the mark earns no performance pay.
- Investors don't pay twice for the same gains.
Transcript
Founder: My fund dropped, then climbed all the way back. Payday, right?
Operator: Not a cent. And investors love you for it.
Founder: That sounds like a bad deal for me.
Operator: Watch. An investor puts in $100,000. It grows to $120,000.
Operator: Your 20% share of the $20,000 gain is $4,000. They're left with $116,000.
Operator: And $116,000 becomes the line. The high-water mark.
Founder: And if it drops?
Operator: Say it falls to $100,000, then climbs back to $116,000.
Founder: So I get paid on the climb.
Operator: Nothing. They already paid you on those gains once. You only earn on gains above the line.
Founder: Fair, honestly.
Founder: So it drops, comes back, and I earn...