In few strategies, I see this high watermark. Can anyone explain what it’s relevance ??
This is method to calculate performance fees to be paid to strategy creator by the strategy subscribers.
Explanation w.r.t strategy creator.
So if you have paid for x amount of profit, next profit sharing amount will be calculate on gross profit after x (current profit - x). This is based on gross profit before the deductions for that month.
For example, the first month your strategy made a profit of 1000 and the profit sharing is 20% then you will be invoiced 200. The next month the strategy makes a profit of 500, Now you will be invoiced 20% of 500 which is 100 and not 20% of 1500.
So if a user made 1 lakh rupees profit and you charged him Rs.20000 fees (20%) … so high watermark has been set at 1 lakh
next user lost Rs.20000 … so there will be no invoice
next user made Rs.50000 … Here the invoice will be only on the new profit (Rs.30000) and you can invoice Rs.6000 on it not on the full 50000 … now the high watermark has been set to Rs.1.3 lakhs (80000 + 50000).
Source: From Umesh Ranglani.
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