HighWaterMark

High-water mark, often abbreviated HWM, is a benchmark that records the highest level reached by a value, metric, or process and serves as a reference point for future calculations. In finance, the term is most commonly used to determine whether a performance fee is owed to a fund manager.

In asset management, the high-water mark protects investors from being charged multiple times for the same gains. The watermark is set at the fund’s highest net asset value (NAV) or share price previously achieved. Performance fees are then payable only on new gains that exceed that previous peak. If the fund declines, no new fees are due until the NAV surpasses the previous high-water mark.

Example: a fund starts with NAV 100 and climbs to 120, triggering a performance fee on the 20 gain. The watermark becomes 120. If the NAV later falls to 110 and then rises to 125, fees are due only on the gains above 120 (the portion that exceeds the prior peak). Some structures include catch-up provisions or fee calculations on net profits after fees; terms vary by contract.

Beyond finance, high-water mark appears in computing and data processing. It can denote the maximum resource usage (such as memory or I/O buffers) or the farthest point of progress in a data stream or replication task. Tracking the high-water mark helps manage resources, measure progress, and determine when to release or allocate additional capacity.

The precise definition and calculation are contract- or system-specific, so documentation should specify how the watermark is set, adjusted, and used for fee or processing decisions.