The High Watermark ensures that the Manager does not get paid large sums for poor performance. In other words, if the Manager loses money over a period, he or she must make profits exceeding the losses before receiving the performance fees. System captures profit and calculates outstanding performance fee after each closed trade. If account is in a loss, negative performance fee will be recorded by the system and no fees will be paid to the Fund Manager.
The High Watermark principle is a common approach to the calculation of the performance fee. It means that the performance fee is paid only on net new rises in asset value. According to the industry standard High Watermark principle the end-of-month profit is compared to the previous month's profit. If the comparison is negative, then no performance fee is collected.
Performance Fees are calculated and processed based on the Investment Period which is considered the period starting from the first day of to the end of the investment account.
For instance, a Manager account has losses of 10,000 USD during the first month but made profits of 25,000 USD during the second month. This means that the Manager has made overall profit of 15,000 USD (25,000 USD - 10,000 USD), which is the amount where the Manager gets paid the agreed performance fee as specified by the Fund Manager.