What is a ‘High-Water Mark’

A high-water mark is the highest peak in value that an investment fund or account has reached. Here at JAS Funds we use this approach as we are 100% performance-based. The high-water mark ensures we only profit when you profit. If our methodology loses money over a period, JAS Funds must get the fund above the high-water mark before receiving a performance bonus from the investment under management (IUM).

BREAKING DOWN ‘High-Water Mark’

High-water marks ensure that you do not have to pay performance fees for poor performance, but more importantly, guarantee that you do not pay performance-based fees twice for the same amount of performance.

High-Water Mark in Practice

For example, assume an investor is invested in a fund that charges a 25% performance fee, which is quite typical in the industry. Assume the investor places $500,000 into the fund, and during its first month, the fund earns a 15% return. Thus, the investor’s original investment is worth $575,000. The investor will then have the 25% fee on this $75,000 gain, which equates to $18,750, deducted from their account.

At this point, the high-water mark for this particular investor is $575,000 less the $18,750, and is now $556,250.

Next, assume the fund loses 20% in the next month. The investor’s account drops to a value of $445,000. This is where the importance of the high-water mark is noted. A performance fee does not have to be paid on any gains from $445,000 to $556,250.

Only gains AFTER the high-water mark amount (of $556,250) will the 25% performance fee be applied.

Assume in the third month, the fund unexpectedly earns a profit of 50%.

In this unlikely case, the value of the investor’s account rises from $445,000 to $667,500. Without a high-water mark in place, the investor owes the original $18,750 fee, plus 25% on the gain from $445,000 to $667,500, which equates to 25% on a gain of $222,500, or an additional $46,000 in performance fees.

The high-water mark prevents this “double fee” from occurring. With a high-water mark in place, all gains from $445,000 to $556,250 are disregarded. But gains above the high-water mark are subject to the performance-based fee. In this example, beyond the original $18,750 performance-based fee, this investor owes 25% on the gains from $556,250 to $667,500, which is an additional $27,812.

If you have any questions on this, just ask us, we’re here to help.

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