CFA Level 1 Question of the Week – Alternative Investments

The correct answer is C.

High water marks serve to prevent investors from paying twice for the same performance.

Option A is incorrect. High water marks reflect the highest cumulative return used to calculate an incentive fee, and it is the highest value, net of fees, that the fund has reached. However, the use of high water marks does not ensure that the fund achieves a specified hurdle rate. The hurdle rate is often set based on a risk-free rate proxy plus a premium but may also be set as an absolute, nominal, or real return target.

Option B is incorrect. High water marks specify the highest value that the fund has reached. This measure will be reset each time the value of the fund increases. However, it does not restrict the value of investments made in the fund.