What is a ‘High-Water Mark’?
A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based. 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 (AUM).
Assume an amount of $100,000 is invested for 12 months, and the Performance Fee is calculated annually.
If Marcus Today SMA return for the year is 25% and the benchmark return is 20% then the excess performance is 5% and the Performance Fee would be calculated as follows:
the investment return achieved is 25% of $100,000 = $25,000
the benchmark return is 20% of $100,000 = $20,000
value added (excess performance above benchmark) is ($25,000 – $20,000) = $5,000
The Performance Fee is 10% of excess performance above benchmark, then the fee charged would be 10% of $5,000 = $500.