# High Watermark Normally Calculated Before or After the Performance fee is taken?

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Hedge fund super basic question, let's say an account goes from \$1 million to \$2 million and the GP collects 20% of all profits. In this scenario the GP takes \$200k so now the LP is left with \$1.8 million. Is the high watermark to calculate future performance fees based on the \$1.8 million or the \$2 million before the fee?

I'm sure different funds calculate both ways but do most funds calculate the high watermark before the fee? To put another way, the GP now has to earn a little over 10% just to get into the black to start earning the next fee?

Thanks.

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Hedge fund super basic question, let's say an account goes from \$1 million to \$2 million and the GP collects 20% of all profits. In this scenario the GP takes \$200k so now the LP is left with \$1.8 million. Is the high watermark to calculate future performance fees based on the \$1.8 million or the \$2 million before the fee?

I'm sure different funds calculate both ways but do most funds calculate the high watermark before the fee? To put another way, the GP now has to earn a little over 10% just to get into the black to start earning the next fee?

Thanks.

Generally its the former...the LP would be left with \$1.8M.

If the GP reinvests their fees, then there would be X number of units issued to the GP at the month-end unit price of Y.  All of the units would be priced at Y at month-end.  In this case, the LP would have \$2M in it, but a higher number of total units.

If new capital now comes in, it would be brought in at the price of Y.

The fund would now have to achieve above the monthly hurdle on the total number of units before new capital came in, but after the GP reinvestment was made...so the watermark is actually \$2M.  If no reinvestment by the GP, but new capital comes in, then the high watermark would be \$1.8M.

Cheers!

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If it helps, think of the performance fee as accruing all along before it is actually paid.  So the LP never really had \$2million.

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