High Water Marks

37 Pages Posted: 5 Sep 2000  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Jonathan E. Ingersoll Jr.

Yale School of Management - International Center for Finance

Stephen A. Ross

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Yale University - International Center for Finance

Date Written: February 1998

Abstract

Incentive fees for money managers are frequently accompanied by high-water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the cost of the high-water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.

Suggested Citation

Goetzmann, William N. and Ingersoll, Jonathan E. and Ross, Stephen A., High Water Marks (February 1998). NBER Working Paper No. w6413. Available at SSRN: https://ssrn.com/abstract=226161

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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P.O. Box 208200
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203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Jonathan E. Ingersoll Jr.

Yale School of Management - International Center for Finance ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5924 (Phone)
203-432-6974 (Fax)

Stephen A. Ross

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
203-432-6015 (Phone)
203-432-8931 (Fax)

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