A high water mark is a limiting factor of hedge fund manager compensation.This means that managers can't charge incentive fees ________.

Question

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A high water mark ensures that a hedge fund manager only receives an incentive fee when the fund exceeds its previous highest value. Therefore, if a fund falls and does not recover to its previous high value, the manager cannot charge an incentive fee until the fund surpasses the previous high water mark. This is the purpose of the high water mark – to align the interests of the manager with the investors and ensure that the manager only earns performance fees when the investors' capital is actually growing. A high water mark does not affect a manager's ability to charge an incentive fee when a fund stays flat or experiences a loss of less than 10%.

A High Water Mark Is a Limiting Factor of Hedge