CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns
A hedge fund investor is reviewing the fund's fee terms. A high-water mark provision is most likely intended to:
A high-water mark is most likely intended to prevent incentive fees being paid again on recovered losses. The manager earns an incentive fee only when the fund value exceeds its previous peak, so investors do not pay twice for the same gains.
- Aprevent incentive fees being paid again on recovered lossesCorrect
- Blimit the fund's leverage to a set multiple of capital
- Crestrict redemptions during the first year of investment
Explanation
A high-water mark means the manager earns incentive fees only on gains above the fund's previous peak value. This stops the investor paying twice for recovering earlier losses. Leverage limits and lockups are separate terms.
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