Lesson 7 of 8 · 13 min

High-water marks, investor timing and either/or fees

A high-water mark stops the manager charging performance fees twice on the same gains, which means investors who entered at different times pay different fees for the same fund performance.

In short

  • The high-water mark (HWM) is the highest net-of-fee value the investor's capital has reached at the end of any previous period.
  • Performance fees are charged only on value above the HWM: p×max⁡[0,Pt(1−rm)−PHWM]p \times \max[0, P_t(1 - r_m) - P_{HWM}].
  • After a loss, the manager earns only the management fee until the HWM is regained.
  • A hurdle affects every investor equally; a HWM is investor-specific: a new investor after a drawdown pays more fees than an original investor in the same year.
  • Either/or fees with a HWM: each year the manager takes the larger of the management fee and the incentive fee above the HWM.

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High-water marks, investor timing and either/or fees · Alternative Investment Performance and Returns