High-water mark

The highest value a fund or vault's share price has previously reached. Performance fees are charged only on gains above that peak, not on gains that merely recover an earlier loss.

Definition

A high-water mark is the level a vault has to beat before its manager earns a performance fee again. If the share price falls, the mark stays where it was, and everything up to that point counts as recovery rather than profit.

The problem it fixes

Without it, a manager is paid for volatility. A vault that gains, gives it back, and gains again produces a fee on each upswing while the depositor has ended up nowhere.

The mark makes the fee depend on cumulative performance rather than on the most recent stretch, which is the only version that matches what a depositor actually earned.

What it still does not fix

The manager’s downside. A performance fee is a share of gains and never a share of losses, so a manager takes part of the upside while depositors take all of the downside. The high-water mark limits double-charging; it does not make the arrangement symmetrical.

There is also an incentive worth knowing about. A vault far below its mark earns its manager nothing for a long stretch, which is a reason to take more risk to get back above it, or to close the vault and start again with the mark reset.

What to check

Whether the mark is per depositor or for the vault as a whole, since entering after a drawdown can mean benefiting from a mark you did not lose anything to, or the opposite. Whether it resets on any schedule. And how the performance fee interacts with any management fee charged regardless of results.

Where you will run into it

In the fee terms of trading vaults on perpetual DEXs, including user-created vaults run by a vault leader, and in fund documentation generally, where the concept originates.