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9) What does high-water mark mean? How does the CTA make money?


A high-water mark is the performance level that the CTA must exceed in order to charge incentive fees and typically is calculated net of brokerage commissions, exchange fees, and the CTA’s management fee and incentive fee payments. For example, an account with a beginning value of $1,000 earns trading profits of $100 and pays a 20% incentive fee during the first billing cycle. The actual ending account value for that billing period is $1,080 ($1,000 + $100 – $20) and the CTA would report these gains as +8% (80/1,000). $1,080 would then be used as the high-water mark for the following billing period. If the CTA made another $100 during the second billing period, the fees would again be $20 ($100 x 20%), leaving an account value of $1,160 ($1,080 + $100 – $20); $1,160 is now the new high-water mark. The performance would be reported as +7.4% ($80/$1080.) Suppose that the CTA lost money during the third billing period. The high-water mark remains $1,160 and an incentive fee would not be charged again until the account value exceeded that amount. Management fees are charged regardless of performance or high-water mark, and are based on account value. It is essential that an investor understand the fees inherent of managed accounts and the methodology used for their calculation. Fees are addressed in the CTA’s disclosure document and advisory agreements.

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Past performance is not necessarily indicative of future results. Trading commodity futures, options, and foreign exchange ("forex") involves substantial risk of loss and is not suitable for all investors. In no way is the advisor of the month a direct recommendation of aiSource or any of its affiliates. Please carefully review the disclosure documents and any other promotional material prior to investing with any program. Managed accounts and/or managed futures are very risky and may not be suitable for all investors. Please consult with a Managed Futures specialists prior to investing.