Performance Fee Structure

The 20% performance fee is only charged for the new dollar of profit above the previous high water mark, ensuring that you are not charged twice on the same profit, and that we ultimately make money proportionate to how much money we make you.

What Is a High-Water Mark?

A high-water mark is the highest peak in value that an account has reached. The high-water mark ensures the manager does not get paid large sums for poor performance. If the manager loses money over a period, he must get the fund above the high-water mark before receiving a performance bonus from the assets under management.

High-Water Mark Example

For example, 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 owes a 20% fee on this $75,000 gain, which equates to $15,000.

At this point, the high-water mark for this particular investor is $575,000, and the investor is obligated to pay $15,000 to the portfolio manager.

Next, assume the fund loses 20% in the next month. The investor’s account drops to a value of $460,000. 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 $460,000 to $575,000, only after the high-water mark amount. Assume that 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 $460,000 to $690,000. Without a high-water mark in place, the investor owes the original $15,000 fee, plus 20% on the gain from $460,000 to $690,000, which equates to 20% on a gain of $230,000, or an additional $46,000 in performance fees.

Value of a High-Water Mark

The high-water mark prevents this “double fee” from occurring. With a high-water mark in place, all gains from $460,000 to $575,000 are disregarded, but gains above the high-water mark are subject to the performance-based fee. In this example, beyond the original $15,000 performance-based fee, this investor owes 20% on the gains from $575,000 to $690,000, which is an additional $23,000.

In total, with a high-water mark in place, the investor owes $38,000 in performance fees, which is $690,000 less than the original investment of $500,000 multiplied by 20%. Without a high-water mark in place, which is below industry standards, the investor owes a 20% performance fee on all gains, which equates to $61,000. The value of a high-water mark is unquestionable.

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