12 Oct 2008

* High Watermark

The highest peak in value that an investment fund/account has reached. This term is often used in the context of fund manager compensation, which is performance based.

The high watermark ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus. For example, say after reaching its peak a fund loses $100,000 in year one, and then makes $250,000 in year two. The manager therefore not only reached the high watermark but exceeded it by $150,000 ($250,000 - $100,000), which is the amount on which the manager gets paid the bonus.

Related words: Crystallize; Equalization; Performance fees

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