The High Watermark principle is a common approach to the calculation of the performance fee. It means that the performance fee is paid only on net new rises in asset value. According to the industry standard High Watermark principle the end-of-month profit is compared to the previous month's profit. If the comparison is negative, then no performance fee is collected.
The High Watermark ensures that the Manager does not get paid large sums for poor performance. In other words, if the Manager loses money over a period, he or she must make profits exceeding the losses before receiving the performance bonus. System captures profit and calculates outstanding performance fee after each closed trade. If account is in a loss, negative performance fee will be recorded by the system and no fees will be paid to the Fund Manager.
Performance Fees are calculated and processed based on the Investment Period which is considered the period starting from the first weekend of each month to the first weekend of the next month.
For instance, a Manager account has losses of 10,000 USD during the first month, but made profits of 25,000 USD during the second calendar month. This means that the Manager has made overall profit of 15,000 USD (25,000 USD - 10,000 USD), which is the amount where the Manager gets paid the agreed performance fee as specified by the Fund Manager.
Investor deposits 10,000 USD in a Manager account on the first day of Period 1. The Performance Fee is 25 % of profits for each period.
|1||10,000 USD||1,000 USD|
|2||11,000 USD||-2,000 USD|
|3||9,000 USD||2,000 USD|
Period 1: Fund Manager generates 1000 USD profit. At the end of the period the Manager is entitled to a Performance Fee of 250 USD. After this fee is paid, system resets outstanding fee to 0 until new profit or loss is recorded.
Period 2: Fund Manager loses 2000 USD, which means that no performance fee is paid by the Investor. System records a negative figure of -500 USD performance fee on that account.
Period 3: Fund Manager makes profit of 2000 USD, but is still not entitled to any performance fee. System calculates 500 USD fee payable which is compared to outstanding success fee from the previous period. New fee does not exceed the negative fee captured on the previous period.
Similarly, in case part of the profit is captured in the open trades, performance fee will be paid for the difference of outstanding fee minus fee captured in the trades.