An amount that is equal to the greatest value reached by an investor’s capital account with a hedge fund, adjusted for additions and withdrawals during a specific period of time (typically a calendar year). The loss carryforward provision (also highwater mark or high water mark) is set to ascertain that the hedge fund’s management charges a performance fee only on the amount of capital gains that exceed the level of the highwater mark determined at the time the performance fee was last charged by the fund’s management.

As an industry standard, this provision 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