> For the complete documentation index, see [llms.txt](https://doc.knightrade.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://doc.knightrade.io/features/vault-trading/fee-structure-in-knightrade/performance-fee.md).

# Performance Fee

The performance fee is a variable fee charged based on the vault's profitability. It rewards vault traders for generating positive returns above a predefined benchmark or hurdle rate. This fee aligns the interests of vault managers with those of investors by incentivizing good performance.

#### Key Characteristics: 

Purpose: Encourages vault managers to achieve superior returns while aligning with investor goals. 

#### Calculation: 

Typically a percentage of the profits earned above a high watermark. The fee is only applied if the vault generates positive returns above the specified benchmark.

High Watermark: Ensures that performance fees are only charged on new profits and not on recovered losses from previous periods. 

#### Example: 

If the performance rate is 20%, the high watermark is $1,000,000, and the vault generates a $50,000 return on a $1,000,000 investment: 

Profit above the high watermark = $50,000

Fee = 20% × $50,000  = $10,000 

`Performance Fee = New income * Performance Rate`

#### Benefits for Investors: 

Vault managers are incentivized to maximize returns. This protects investors by ensuring fees are only charged when returns exceed expectations.