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

Question

Quizplus · Accepted Answer

A high water mark means that the manager can only charge incentive fees on new profits that exceed the fund's previous highest value. If the fund falls and does not recover to its previous high value, the manager cannot charge incentive fees until the fund surpasses the prior high water mark. Therefore, option B is correct. Option A is incorrect because even if a fund stays flat, if it has exceeded its previous high water mark, the manager can still charge incentive fees on new profits. Option C is incorrect because there is no specific percentage drop that triggers the high water mark limitation. Finally, option D is incorrect because the high water mark restricts a manager's ability to charge incentive fees.

A High Water Mark Is a Limiting Factor of Hedge