How To Start A SAAS

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 How High-Water Marks Work for Hedge Funds
 
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 What about high-water marks working in hedge funds? A High-Water Mark is the highest level of value achieved by an investment account or portfolio. It is often used as a threshold for determining whether a fund manager can receive a performance fee. Investors benefit from the high-water mark by avoiding paying performance premiums for underperformance or doubling.
 
 
 
 Investors typically pay a fixed management fee and performance fee to the fund manager. Management fees are calculated as a fixed rate of assets under management (AUM), while performance fees are calculated as a percentage of the growth in assets under management (AUM) over some time. Fund management agreements contain clauses detailing such fees to protect the interests of investors. The high-water mark is the lowest level a fund manager must reach to receive a performance bonus. High-water mark clauses protect investors by avoiding paying a success fee equal to the return if the investment fund or account recovers from previous losses.
 
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 As the graph above shows, the investment portfolio reached its high-water mark in year one but fell in value in year two. The investor will not be charged a performance fee in his second year because assets under management are below the high-water mark. In Year 3, the portfolio regained its growth potential and achieved a higher AUM than in Year 1.
 
 
 
 In this way, a new high-water mark is reached, and the portfolio manager receives a performance bonus on the portion of assets under management that is above the previous high-water mark.
 
 
 Hedge funds typically charge two types of fees.
 
 
 a) Administration fee (2%)
 b)Performance fee (80% for investors, 20% for managers)
 
 
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 2/20 Model
 
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 Suppose the fund starts at $50,000 using the 2/20 model above. Let's say a fund performs very well in period 2, falls in period 3, and rises in period 4. Here are the numbers:
 
 
 Term 1 = $50,000
 
 
 Term 2 = $150,000
 
 
 Term 3 = $100,000
 
 
 Term 4 = $200,000
 
 
 From period 1 to period 2, the investor pays 80% and the manager 20%. There is no income from Term 2 to Term 3, so there is no charge. A high-water mark indicates that no fees will be charged for capital that has already been traded but recently lost. Therefore, the first $50,000 earned from trimesters 3 through 4 will not be charged as it has already been paid. That way, the fund manager won't be paid the same fee twice or three times just because the value of the fund fluctuates. Hedge fund high watermarks allow fund managers to split fees as promised without being double charged.
 
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 High-Water Mark vs. Hurdle Rate
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 The Hurdle Rate represents the minimum return a fund manager must achieve to receive a performance bonus.
 
 
 For example, if an investment fund grows from $1,000,000 to $1,040,000 in one year with a 4% return and a 20% incentive rate, the investor will receive a performance fee of $8,000 ($40,000 * 20%). If a 5% hurdle rate applies, the investor does not have to pay a performance fee because the return does not exceed the hurdle rate.
 
 
 Similar to High Watermark, it also helps investors pay performance fees for returns that fall short of expectations. The main difference is that under the High Watermark clause, the current period's performance fee may be affected by the fund's past performance. However, the current performance bonus is independent of the fund's past returns under the hurdle rate.
 
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How To Start A SAAS

Chapter-1

Chapter-2

Chapter-3

Chapter-4

Chapter-5

Chapter-6

Chapter-7

Chapter-8

Chapter-1

Chapter-2

Chapter-3

Chapter-4

Chapter-5

Dan Lesniak

Cody Davis

Samuel Zell