CFA Level I · CFA Level I Exam · Hedge Funds
A hedge fund has a high-water mark. After a year in which the fund lost value, the high-water mark most likely ensures that the manager:
A high-water mark most likely ensures the manager earns an incentive fee only on gains above the fund's previous peak value. Investors do not pay incentive fees twice on recovering earlier losses, though management fees already paid are not refunded.
- Aearns an incentive fee only on gains above the prior peak valueCorrect
- Brefunds previously collected management fees to investors
- Creceives the incentive fee on all gains regardless of prior losses
Explanation
A high-water mark requires recovering earlier losses before a new incentive fee is earned. It does not refund fees already paid, and it prevents charging on gains that only restore lost value.
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