High water mark method
With this “average” method all shareholders are treated like a single pool as incentive fees are charged at the fund’s level without considering the investments’ purchase date or cost. The calculation is said to be asymmetric as performance fees are averaged between all existing investors on the pro-rata basis of their investment.
It tends to be bias to new investors in both cases when the fund’s net asset value goes up or down. It is not representive of individual losses or gains. This problem is compounded, the more volatile a fund is The problem is compounded when a substantial amount of capital entered. In some cases, some investors are overcharged or when others get a free ride. The NAV per share does not represent the real performance of the fund and investors will often have different performance on their investment. Shares are bought and sold at their NAV after deduction of all fees. NAV per share does not represent the performance of the fund Investors who have already paid incentive fees a negatively biased to new shareholders.
The easiness of the calculation as well as being easily understood have made it being quite popular within the industry. A single NAV per share can be reported to all investors, the listing of the fund