High-Water Performance Fee Calculator

How this is worked out

What the fee is charged on

Not the balance, and not the whole gain. A performance fee is charged on the part of a period's gain that clears a threshold, and the threshold is set by two conditions that bind at different times.

Taking the larger applies whichever condition is currently binding, which is what a fee subject to both conditions means. Their sum would charge twice for one period; the smaller would waive whichever condition happened to be inconvenient.

One period, in full

Writing B for the balance carried in, r for the period's return,h for the hurdle, HWM for the mark carried in and p for the fee rate:

gross     = B × (1 + r)
threshold = the larger of HWM and B × (1 + h)
fee       = p × the greater of 0 and (gross − threshold)
closing   = gross − fee
new HWM   = the larger of HWM and closing

The mark starts at the opening balance and never falls. Every period runs those five lines in order, and the arrangement's whole cost is the fees added up.

Why the order of the returns changes the answer

Nothing above can be shortened into a function of the returns multiplied together.Two paths whose returns multiply to the same number carry different fees whenever they visit their high and their low in a different order, and this is not a rounding artefact — it is what a running maximum does.

The model's own worked pair is the shortest way to see it. Take a starting balance of 100, a fee of 20% and no hurdle. A path of +50% then −20% ends at 120 before fees and pays 10. The same two returns in the other order — −20% then +50% — also ends at 120 before fees and pays 4, because the second period spends most of its gain climbing back to a mark it had already set. The gross ending balance is identical and the net endings are 112 and 116.

That is why this calculator asks for a path rather than a total. A headline rate applied to a total return is not what this arrangement charges, and a reader who computed it that way would get a number the fee never takes.

What you enter

Starting balance

An amount, in your own currency. Nothing here assumes or prints one

The path

One gross return per crystallisation period, in the order they arrived

Fee rate

A share of the qualifying gain, not of the balance and not of the whole gain

Hurdle

A return per period the gain has to beat, on the same footing as the returns

What is assumed

• One entry in the path is one crystallisation period — the point at which the fee is actually charged. A monthly series against an annual charge is compounded into years before it is entered.
• The hurdle is hard: the fee is charged on the excess over it, never on the whole gain once it is cleared. The soft form is a real arrangement and is a different one.
• The high-water mark is net of fees, which is the balance a holder actually owns. Marking it gross would make the same value have to be earned twice.
• The comparison is the identical path with the fee rate set to zero — same returns, same periods, no charge.
• The path is yours. Nothing here generates a return, and no figure on this page depends on a market.

What is not modelled

Each of these changes what an arrangement costs, and none of them is in the arithmetic. The figure this page reports is the performance fee alone.

• a management fee charged on the balance, which is a different mechanism with its own calculator on this site
• equalisation and series accounting, which exist to make a performance fee fair between investors who joined at different times
• clawback, and any refund of a fee already crystallised
• subscriptions and redemptions during the path
• a soft hurdle, under which clearing the hurdle makes the whole gain chargeable
• any probability that a path of this shape occurs at all
• tax, in any jurisdiction

A charge levied on the balance rather than on a gain works differently and compounds differently.The explainer on how investment fees compound covers that mechanism, and this site has a separate calculator for it.