High-Water Mark
The highest value a fund has previously reached, used to ensure a manager only collects a performance fee on genuinely new gains above that prior peak, not on merely recovering past losses.
A high-water mark is the highest value a fund has ever previously reached, used as a reference point to ensure a fund manager only collects a performance fee (see Kaavon's "Management Fee and Performance Fee" glossary definition) on genuinely new profits above that prior peak, rather than being paid again on gains that merely bring the fund back up to a level it had already reached before a subsequent decline.
Without a high-water mark, a fund that lost 20% and then gained 20% back would technically generate a "profit" on that second move even though the investor is still worse off than at the original starting point, letting the manager collect a performance fee despite the investor having made no genuine net progress. A high-water mark protects investors from exactly this scenario by requiring the fund to climb back above its previous all-time peak before any new performance fee becomes payable again.
Examples
- A fund that fell 20% and then recovered exactly 20% hasn't actually surpassed its prior high-water mark, so no new performance fee becomes payable despite the apparent recovery.
- A high-water mark protects investors from paying a performance fee twice on the same underlying gains, once before a decline and again on the mere recovery back to the previous peak.