# High Water Mark

The high water mark method is a calculation of the performance fee, which is commonly used in the hedge fund industry. It prevents charging twice an investor on the same range of profit.

Here is a simulation on 12 intervals of time:

Interval 1: The trader makes a profit of \$2,500. The performance fee is 20%, so \$500 goes to the trader (20% of \$2,500) and \$2,000 goes to the investor. So the investor’s equity after the first interval is now \$102,000. It is the new high water mark or net equity benchmark below which no new performance fee can be charged.

Interval 2: The trader makes a profit of \$3,200. The performance fee is 20%, so \$640 goes to the trader (20% of \$3,200) and USD 2,560 goes to the investor. So the investor’s equity after the second interval is \$104,560. It is the new high water mark.

Interval 3: The trader loses \$2,300 and no performance fee is charged. So the investor’s equity after the third interval is \$102,260 and the high water mark remains \$104,560 (gap to fill: \$2,300).

Interval 4: The trader makes a profit of \$2,000, which is not enough to reach the high water mark (\$104,560). The investor’s equity after the fourth interval is \$104,260. Even if the gap to fill is reduced to \$300, no performance fee is charged.

Interval 5: The trader makes a profit of \$5,900. The first 300\$ fill the gap to reach the high water mark and the remaining 5,600\$ is a new performance. The performance fee is 20%, so \$1,120 goes to the trader (20% of \$5,600). The investor’s equity after the fifth interval is \$109,040 (104,260+5,900-1,120). It is the new high water mark or net equity benchmark below which no new performance fee can be charged.

… etc