A High Water Mark, is a common approach to the calculation of incentive fees. It means that incentive fees are paid only on any new profit that is made. This ensures that it is fair to the client as we can only receive a performance fee only when the account value exceeds its previous high. Example of HWM. You start with $100,000 in an account with a performance fee of 50%, and during the month there is $10,000 gross profit. The performance fee deducted would be 50% of $10,000, which is $5,000, so your net profit would be $5,000 and your account would now have a “watermark” new balance of $55,000. If in the next month there was a loss of $1,000, there would be no performance fee deducted, since there is no profit, and your new balance would be $99,000. Your “watermark” is still $99,000. So there will be no performance fee deductions until you get past your current “watermark”.