Hedonova uses a high-watermark fee structure to ensure that investors are not charged twice for the same profits.
Let's assume an investor starts investing with $10,000. At the end of the year, the portfolio stands at $14,000. The fund charges a 20% performance fee on the gains (20% of $4000). So $14000 becomes the high watermark for the year.
Now, let's say the following year experiences an economic downturn where the majority of investment assets declines in value. The investor's portfolio at the end of the year now stands at $12,000, down from $14,000 the year before. Since it's a down year and the investor did not make a profit, Hedonova does not charge any performance fee.
Year 3 was spectacular. The investor's portfolio is riding high, from a low of $12000 in Year 2 to $20000 in Year 3. Common sense would say that the investor is charged for the profits of the year, or 20% of $8000 ($20000 - $12000) which equals $1600. But that's unfair to the investor because he's already been charged for the gains made between $12,000 to $14,000 in Year 1. So it makes sense to exclude any gains up to $14000.
Any performance fee charged should be on the profits made above the $14000 mark, or the high watermark. Hence performance fee charged in Year 3 will be 20% off ($18000 - $14000) or $800.