In a PAMM (Percentage Allocation Management Module) account, the High Water Mark ensures that performance fees are only charged when the trader surpasses their previous peak performance, protecting the investor.
Here's a simplified breakdown:
- Starting Point: If you invest $10,000, the trader manages your funds.
- Initial Performance: If the trader grows your investment to $12,000, this $12,000 becomes the "High Water Mark."
- Losses: If the account value drops to $11,000, no performance fee is charged, even if it recovers slightly.
- Recovery and Profit: When the account grows beyond $12,000 (to say $13,000), performance fees can be charged only on the profit exceeding the High Water Mark ($1,000 in this case).
This mechanism ensures fairness by preventing performance fees unless your investment surpasses its previous peak.
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