Lesson 7 of 10 · All lessons in this module
- Why appraisal is harder: the life cycle and the J-curveVideo lesson
- Measuring returns: IRR versus MOICVideo lesson
- Leverage: magnifying gains and losses
- Valuation: fair value levels and smoothed returns
- Fees, custom terms and redemption provisions
- Hurdle rates, catch-up, waterfalls and clawbackVideo lesson
- High-water marks, investor timing and either/or feesVideo lesson
- Integrated case: hurdle rate and high-water mark in one fee
- Integrated case: three investors, one fund, four years
- Funds of funds, benchmarks and index biases
Lesson 7 of 10 · 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: .
- 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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