Hedge fund: Difference between revisions

Revision as of 08:33, 18 January 2007

Revision as of 22:05, 18 January 2007

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=== High water marks ===

A "High water mark" is usually used. {{facts}} This means that the manager does not receive incentive fees unless the value of the fund exceeds the highest value it has achieved previously achieved. For example, if a fund was launced at a NAV of 100 and rose to 130 in its first year, a performance fee would be payable on the 30% return. If the next year it dropped to 120, no fee is payable. If in the third year the NAV rises to 143, a performance fee will be payable only on the 10% return from 130 to 143 (which is 10%) rather than on the full return from 120 to 143.

This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. If a high water mark is not used, a fund that ends alternate years at 100 and 110 would generate performance fee every other year, enriching the manager but not the investors. However, this mechanism does not provide complete protection to investors as a manager that has lost money may simply decide to close the fund and start again with a clean slate -- provided, of course, he can persuade investors to trust him with their money.