High-Water MarkHWM
A high-water mark is the peak value an account or fund has ever reached. Performance fees are usually charged only on gains above that peak, so investors don't pay twice for winning back the same losses.
A fund that loses 20% one year and earns it back the next hasn't made you any money — so why should it get paid a performance fee? The high-water mark is the rule that stops that from happening.
- Category
- Accounting, Tax and Operations
- Reading time
- 3 min
- Also called
- High water mark, HWM, Peak NAV
- Updated
High-water mark in plain words
It is simply the highest value the fund has ever reached.1
Funds commonly limit performance fees with a high-water mark, a hurdle rate, or both.2
The rule means the manager earns an incentive fee on any given dollar of gain just once.3
How a high-water mark works, step by step
Start at the peak
A mark is set right after incentive pay is allocated.1
Measure the period
Fees are typically assessed quarterly or annually.3
Compare to the mark
If value is below the mark, no performance fee is due.
Check any hurdle
Some funds also require a minimum return first.1
Charge only above
Apply the fee rate only to the gain above the mark.
Reset the mark
The new peak becomes the next mark.1
Worked examples
Example 1 — Fee on new gains
+8% netA hypothetical fund's mark is $100 per unit; it ends the year at $110 with a 20% fee.
| Gain above mark | $110 − $100 = $10 |
| Fee | $10 × 20% = $2 |
| Net to investor | $110 − $2 = $108 |
Performance fees are limited by the high-water mark, so only the $10 above the peak is charged.2
Example 2 — Recovering losses
$0 fee on $18 recoveryThe same fund falls to $90, then recovers to $108 (mark now $108).
| Year 2 | $108 → $90 (no fee) |
| Year 3 | $90 → $108 (no fee) |
| Fee paid | $0 |
The fund was only winning back earlier losses, so no fee was due on the recovery.3
Example 3 — Hurdle plus mark
Fee $1.40A hypothetical fund has a $100 mark, a 5% hurdle and a 20% fee; it ends at $112.
| Hurdle level | $100 × 1.05 = $105 |
| Gain above hurdle | $112 − $105 = $7 |
| Fee | $7 × 20% = $1.40 |
A hurdle requires a set return before the manager earns performance pay, reducing the fee from $2.40 to $1.40.1
High-water mark vs hurdle rate
| Aspect | High-water mark | Hurdle rate |
|---|---|---|
| What it is | Previous peak value | Minimum return |
| Protects against | Paying twice for recovery | Paying for small gains |
| Resets | At each new peak | Each period |
| Can combine | Yes | Yes |
Where high-water marks are used
Hedge funds
Limiting performance fees.
Managed accounts
Charging only on new profits.
Prop and copy trading
Profit splits paid above prior peaks.
Personal tracking
Measuring Drawdown from your own peak.
Advantages and disadvantages
Advantages
- Stops paying twice for the same gains.
- Aligns fees with real profits.
- Easy to check from fund values.
Disadvantages
- Managers may take more risk to reach the mark.
- Far-below-mark funds may see managers leave.
- Fee math gets complex with many investors.
- It does not stop management fees.
Going deeper
Read as far as you need. Each level builds on the one before it.
The previous peak
Beginner
The mark is simply the highest value the fund has reached.1
Fees only once
Intermediate
A high-water mark makes sure each dollar of profit is charged a fee only one time.3
Incentive effects
Advanced
Performance fees could motivate managers to take greater risks, especially when a fund sits below its mark.2
Common mistakes
Confusing mark and hurdle
They are separate tests.
Ignoring the management fee
Fixed fees apply even below the mark.
Assuming it's standard
Check the documents; not every fund has one.
Forgetting the entry date
Your mark may depend on when you invested.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The mark is the fund's previous peak.
- Fees apply only above it.
- Recovering losses is fee-free.
- Hurdles are an extra test.
- Fees can encourage risk-taking.
Frequently asked questions
Does every hedge fund use a high-water mark?
Can the mark be reset lower?
Is the fee legal everywhere?
Further learning
- Drawdown
Distance from the peak.
- Trading Fees and Commissions
Other costs to compare.
- Sharpe Ratio
Judging risk-adjusted returns.
- Profit and Loss
Measuring gains.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- NAIC. Hedge Fund Primer (opens in a new tab) Checked .
- Investor.gov (SEC). Hedge Funds (opens in a new tab) Checked .
- CFA Institute Research Foundation. Investing in Hedge Funds: A Survey (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Max Drawdown (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.