Question

Use the information in the following table to answer the question. Note the fund started with 100 Net Asset Value

at the start of 2012. 2012 2013 2014 2015 2016 2017 2018 2019

Return 7.7% 10.4% 21.9% -2.2% 24.8% -20.5% 12.8% 7.7%

Asset Value 107.67 118.83 144.83 141.67 176.83 140.50 158.50 170.67

1)Given the above hedge fund manager’s performance, which year(s) would the manager get paid on their high watermark?

2)Calculate the rolling 3 years' average returns and identify which year(s) the managers get paid the high watermark?  

3) Explain why managers are paid the high water mark during the years identified above

Answer 1

A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based

1)

since hedge fund made 7.7% return in 2012 now it will get fees when it crosses hurdle rate of 7.7% that is

year 2013 - 10.4%

now new hurdle rate is 10.4% he will get fees when he crosses 10.4%

year 2014 - 21.9%

now new hurdle rate is 21.9% he will get fees when he crosses 21.9%

year 2016 - 24.8%

2)

year	return	average return of 3 years
2012	7.70%
2013	10.40%
2014	21.90%	13.33%
2015	-2.20%	10.03%
2016	24.80%	14.83%
2017	-20.50%	0.70%
2018	12.80%	5.70%
2019	7.70%	0.00%

first hurdle rate is 13.33% hedge fund manager will be paid on average return higher than 13.33% i.e.

year 2016 - 14.83%

3)

A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based. The high-water mark ensures the manager does not get paid large sums for poor performance. If the manager loses money over a period, he must get the fund above the high-water mark before receiving a performance bonus from the assets under management (AUM).