If your portfolio underperforms the adjusted high-water mark, any underperformance is tracked and has to be recovered by any subsequent outperformance before a performance fee can be accrued.
If there is already a performance fee accrual during the calendar year, the accrual will be reduced to reflect any subsequent underperformance, although this will not be reduced below zero. To be clear, where there is outperformance over the full calendar year which results in a performance fee being charged, and this is followed by underperformance in subsequent calendar years, there will be no refund of prior year performance fees.
As can be seen from the above illustration, the benchmark hurdle is applied to the high-water mark to calculate an adjusted high-water mark, which the net asset value must exceed before there can be an accrual of performance fees. Note that you may be subject to different performance fee accruals depending on holding periods/withdrawal dates.
Where this occurs and there is positive cumulative net excess return at the calendar year end, then a performance fee will be charged and the high-water mark/adjusted high-water mark will be reset to the net asset value (adjusted for cash top-ups and cash withdrawals) on the last calendar day of the year.