High-Water Mark (HWM)

A high-water mark prevents a manager from being paid twice for the same performance. After a loss, the fund must first recover to its previous peak before a new performance fee is earned. The HWM is reset each time a fee crystallizes.

HWMs can be tracked per share class, per series under series accounting, or per investor in partnership capital accounts. The offering documents define whether the HWM is adjusted for subscriptions, redemptions or distributions, and whether it ever resets.

Pitfalls include failing to carry forward HWMs when investors transfer or switch classes, resetting the HWM when fees accrue but do not crystallize, and applying a fund-level HWM when documents require investor-level tracking. Investor-level HWM records should be reconciled to the administrator’s records at each crystallization date so that disputes can be resolved from evidence rather than reconstruction.

Example

An investor enters at $100 per share (HWM $100). In year 1 NAV falls to $90: no fee. In year 2 NAV rises to $105 before fees. The 20% fee applies only to the $5 above the HWM, so the fee is $1.00 per share. Post-fee NAV is $104, which becomes the new HWM.