High-Water Mark Model
The High-Water Mark (HWM) Model is the method used to calculate the performance fees a strategy receives from followers.
A HWM is the highest value that your following account has reached when charged for a performance fee.
The HWM ensures that the strategy provider does not get paid twice for the same performance.
The strategy provider gets paid fees only when new profit is gained for the follower's account.
In brief, the HWM works as follows
- An investor decides to invest a certain amount e.g. 10000, in a strategy with a certain performance fee e.g. 30%. The HWM at this point is the initial investment amount.
- At a certain point in time e.g. 1st of each month, the performance fee is evaluated and deducted from the followers account. The fee is charged only on the difference between the account's equity and the HWM.
- After the fee is deducted, the account's equity before fee realization becomes the new HWM.
- The next time the performance fee is evaluated, it is only charged if the account's equity has surpassed the previous HWM and only for the amount that it
- If the account's equity is below the HWM, then no fees are charged.
Example of High-Water Mark Calculation
Below you can find an example of the calculation of the HWM:
| Account Equity (Start of Month) | High Water Mark | Account Equity (End of Month) | Amount to be charged (Equity - HWM) | Performance Fee (30% on profit) |
|---|---|---|---|---|
| 10000 | 10000 | 12000 | 2000 | 600 |
| 11400 | 12000 | 11000 | 0 | 0 |
| 11000 | 12000 | 12500 | 500 | 150 |
| 12350 | 12500 | 14000 | 1650 | 495 |
High-Water Mark Evaluation Points¶
The HWM is evaluated and set if conditions are met when the following events occur:
- 1st of each month.
- Follower withdraws funds.
- Follower stops following.
- Strategy provider stops providing strategy.
Last update: November 30, 2023