Category III AIFs often use a High-Water Mark principle for performance fees. This means the manager only gets paid a performance fee if the fund’s value exceeds its highest previous peak.
If a fund drops 20% one year and gains 20% the next, the manager gets no performance fee in the second year, because they are just recovering lost ground. They only get paid for generating new wealth. This protects investors from paying fees on volatility rather than true growth.
