Glossary
High Water Mark
A high water mark is the highest value a fund or investment account has previously reached. In hedge funds or performance-based fee structures, it ensures that managers only earn incentive fees on new profits above this peak—protecting investors from paying fees on recovered losses.
Why is a high water mark important?
It ensures fund managers only earn performance fees when the fund’s value exceeds its previous highest point, aligning incentives with investor performance.
How does it work in hedge funds?
If a fund falls in value, the manager must recover those losses before charging performance fees again—protecting investors from fees on temporary rebounds.
Is a high water mark the same as a hurdle rate?
No. A hurdle rate is a minimum return required before any performance fees apply. A high water mark is the highest past value the fund must exceed to trigger fees.
Can high water marks be reset?
Only under specific terms, such as fund restructuring, new investment classes, or after significant losses. Otherwise, the high water mark remains as a long-term reference point.
Do all investment funds use high water marks?
No. They’re most common in hedge funds and private equity, but not all funds or managers include them in their fee structures.
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