In which year would the Red Grass Fund’s investment management fee be affected by Summer’s recalculation using the high-water mark?

A. 2016 B. 2017 C. 2018 The Tree Fallers Endowment plans to allocate part of its portfolio to alternative investment funds. The endowment has hired Kurt Summer, a consultant at Summer Brothers Consultants, to identify suitable alternative investment funds for its portfolio.
Summer has identified three funds for potential investment and will present the performance of these investments to the endowment’s board of directors at their next quarterly meeting.
Summer is reviewing each of the fund’s fee schedules and is concerned about the manager’s incentive to take on excess risk in an attempt to generate a higher fee. Exhibit 1 presents the fee schedules of the three funds.

Exhibit 2 presents the annual gross returns for each fund and its respective benchmark for the period of 2016–2018. All funds have an inception date of 1 January 2016. Summer intends to include in his report an explanation of the impact of the fee structures of the three funds on returns.

The board of directors of the Tree Fallers Endowment asks Summer to recalculate the fees of the Red Grass Fund assuming a high-water mark feature whereby a sharing percentage could only be charged to the extent any losses had been recouped.

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EXHIBIT 1 Fee Schedules Fund Red Grass Fund Maximum Computed Fee Base Fee Sharing Annual Fee Higher of either (1) base or (2) base plus sharing 1.00% of positive performance; sharing is based on 20% na return net of the base fee. Blue Water Fund Higher of either (1) base or (2) base plus sharing 0.50% of positive performance, up to a maximum annual 20% 2.50% fee of 2.50%; sharing is based on active return. Yellow Base plus sharing of both positive and negative 1.50% 20% na Wood Fund performance; sharing is based on return net of the base fee.