A high-water mark is the highest value an investment has previously reached. When a performance fee uses one, the fee is charged only on gains above that peak — never on recovering ground that was already paid for.
How it works
An account starts at $100,000 and grows to $120,000. A 20% performance fee is charged on the $20,000 gain: $4,000. The high-water mark is now $120,000.
The account falls to $105,000, then recovers to $120,000. No fee is charged — nothing has been earned above the mark. It rises to $130,000. The fee applies to the $10,000 above $120,000, not to the $25,000 from the trough.
Why it exists
Without one, a manager earns fees on the way up, earns nothing on the way down, then earns fees again recovering to where they were. The investor pays twice for the same dollar of value. A high-water mark makes the fee track cumulative performance rather than each upswing.
Where it has gaps
Resets. Some structures reset the mark after a period, or when a new investor enters, or when the fund restructures. Each reset lets the manager charge again on recovered ground.
Fee crystallisation timing. A mark measured annually behaves differently from one measured monthly. Frequent crystallisation charges more often on smaller gains.
Loss carryforward without a mark. Some funds instead carry losses forward against future gains — similar in effect, but the terms differ and are worth reading.
What to look for
That the mark is per-investor, not per-fund. That it never resets without a stated reason. That the crystallisation period is clear. A performance fee with a clean high-water mark is a fair structure. One without is a fee on volatility.