Alternative investment managers usually charge an annual management fee plus an additional performance fee. The performance fee charged is usually around 15-20% of the returns generated by the manager. In theory, the performance fee is an incentive for the manager to generate the maximum return on the money invested. Some incentive fee structures go one step further imposing thresholds before the performance fee kicks in. The most common of these structures are the high water mark and the hurdle rate. A performance fee with a high water mark usually means that the fee is only paid when the value of the fund's shares exceed the maximum share value in previous months when the manager has been compensated. Typically, if the manager makes any losses, those accumulated losses have to be recouped before the performance fee is paid.

A mechanism that ensures a fund only takes fees on profits unique to an individual investment. For example: a US$1,000,000 investment is made in year 1 and the fund declines by 50%, leaving US$500,000 in the fund. In year 2, the fund returns 100%, bring the investment value back to US$1,000,000. If a fund has a high water mark, it will not take incentive fees on the return in year 2, since the investment has never grown. The fund will only take incentive fees if the investment grows above the initial level of US$1,000,000.

Value used for performance-related management fees, often simply known as performance fees. The fund manager calculates his or her participation in the fund's earnings on the basis of the performance over and above the net asset value's most recent high. The result is that the performance fee is only paid once any losses have been fully recouped.