HighWater Marks?

if NAV <= HWM…no incentive payments else if NAV>HWM…incentive payments made to Hedge fund manager.
 
HWM is a pre specified NAV (highest NAV acheived in the last reporting period) that a fund must achieve before performance fees are payable to them (otheriwse asymmetric incentive payouts)
 
if you encounter a loss - till you make it back up past the previous highest HWM - you will not get paid an incentive. In other words - you cannot double count your incentive.
 
1.Set HWM to a particular level
2.if Hedge fund’s NAV exceed the HWM, then pay incentive fees and set the HWM to the highest end of period NAV to avoid compensating the manager for a return he already earned previosuly for the fund.
3.if NAV does not exceed the HWM , no incentive payments made to the manager.
 
HWM affects the incentive fees. It’s a NAV that the manager must exceed before receiving the performance-based incentive fee. A provision to protect clients’ benefits.
It’s usually a nav = the highest year-end value till now if no in/out cash flows, but it may differ due to different fiscal year or agreement on incentive fee. So it could be complex in practice.
It remind me of fee cap, performance netting risk, and max drawdown. But these are more like distractors.
 
Does the HWM deduct the management fee and performance fee?
For example:
Initial NAV: 100
Incentive fee: 20%
Performance fee: 2%
After one year, the NAV up 10.
Is the high water market
1) 100 + 100*0.1 = 110 or
2) 100 + 100*0.1 - 100*0.02 (management fee) - 10*0.2 (Performance fee) = 106
Thanks!
 
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