The High-Water Mark (HWM) method is one way to calculate performance fees (incentive fees) applied to investors. This method uses the highest historical valuation of a copy trading account as a benchmark, preventing double payment of fees for the same performance.
With this method, strategy providers can only receive a fee when new profits are generated.
Basic Principles of the HWM Method
- The initial investment amount at the start of copy trading is set as the HWM.
- On the 1st of each month (or when another trigger event occurs), the performance fee is calculated and deducted from the investor’s account.
- The performance fee is calculated based on the difference between the account valuation (equity) at the end of the month and the HWM.
- After the fee deduction, if the pre-deduction valuation exceeds the HWM, that valuation becomes the new HWM.
- The equity at the beginning of the month does not include the performance fee deduction.
- If the end-of-month valuation falls below the HWM, no performance fee is charged.
Calculation Example
In the following example, an investor starts copy trading with a principal of EUR 10,000, and the performance fee rate is 30%.
| Month | Equity at the Beginning of the Month | HWM | Equity at the End of the Month | Taxable Amount | Performance Fee (30%) |
|---|---|---|---|---|---|
| January | €10,000 | €10,000 | €12,000 | €2,000 | €600 |
| February | €11,400 | €12,000 | €11,000 | €0 | €0 |
| March | €11,000 | €12,000 | €12,500 | €500 | €150 |
| April | €12,350 | €12,500 | €14,000 | €1,500 | €450 |
※Equity = Account Balance + Current Unrealized Profit (profit from trades not yet closed) – Current Unrealized Loss (loss from trades not yet closed) + Bonus (if applicable)
Timing of HWM Recalculation (Trigger Events)
- The 1st of each month
- When the strategy provider stops providing the strategy
- When the investor (trader) stops copy trading
- When the investor (trader) withdraws funds from the copy trading account
