The High-Water Mark ensures that fund managers only earn performance fees when the fund’s NAV (Net Asset Value) surpasses its previous highest value. This aligns interests between managers and investors, as it discourages risk-taking solely to recover prior losses. It's especially relevant in hedge funds and Private Equity structures that charge incentive fees. If a fund drops in value, it must recover that loss before any new performance fee is charged, which helps maintain fairness and builds allocator trust. The concept often works alongside a hurdle rate and is reviewed during Operational Due Diligence (ODD).