High-Water Mark

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DEFINITION of 'High-Water Mark'

The highest peak in value that an investment fund/account has reached. This term is often used in the context of fund manager compensation, which is performance based.

BREAKING DOWN 'High-Water Mark'

The high-water mark ensures that the manager does not get paid large sums for poor performance. So if the manager loses money over a period, he or she must get the fund above the high watermark before receiving a performance bonus. For example, say after reaching its peak a fund loses $100,000 in year one, and then makes $250,000 in year two. The manager therefore not only reached the high-water mark but exceeded it by $150,000 ($250,000 - $100,000), which is the amount on which the manager gets paid the bonus.

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