An industry standard that is used to determine payment of performance fees (to a hedge fund‘s management). It helps limit excessive profit taking by the management: entitlement to the performance fee is contingent on recouping all losses incurred by investors. In other words, the standard will ensure that managers do not take performance fees, more than once, on the same of amount of gains made by the fund.
A high watermark constitutes the highest level reached by the fund since inception and is applied on an ongoing basis with a prospective view. The fund’s management is required to bring the fund’s account back to the high watermark (HWM) before its entitlement to a performance fee is established.
