Base high water mark calculation on net of fees NAV

[wphan]

the high water mark (HWM) is currently based on the gross value before fees are taken out, rather than the net value after fees.

This makes it harder than intended for managers to earn fees on new profits since they must exceed the previous peak value before fees were deducted, rather than the actual net asset value after fees.

Code reference:

drift-vaults/programs/drift_vaults/src/state/traits.rs

Line 87 in 5f1cc99

let profit = total_amount.cast::<i64>()?.safe_sub(

Specific code snippets:

// How profit is calculated - shows gross HWM tracking
let profit = total_amount.cast::<i64>()?.safe_sub(
    self.get_net_deposits()
        .safe_add(self.get_cumulative_profit_share_amount())?,
)?;

// Updates gross HWM tracking
self.set_cumulative_profit_share_amount(
    self.get_cumulative_profit_share_amount()
        .safe_add(profit_u128.cast()?)?,
);

// Fee calculation and application
let profit_share_shares: u128 =
    vault_amount_to_depositor_shares(profit_share, vault.total_shares, vault_equity)?;
self.decrease_vault_shares(profit_share_shares, vault)?;
vault.user_shares = vault.user_shares.safe_sub(profit_share_shares)?;
This can create such problems as:

1. Managers don’t earn fees on legitimate new value creation if below the gross HWM

2. Creates higher hurdles for earning performance fees after drawdowns

3. Could incentivize suboptimal trading patterns for depositors to work around the HWM structure

Example:
Traditional NAV (net HWM):

1. Deposit $100
2. Make $100 in PnL
3. Apply 30% fees -> $70 Net PnL and $30 to fund manager
4. New HWM -> $170 (Next fee triggers above $170)

Current Implementation (gross HWM):

1. Deposit $100
2. Make $100 in PnL
3. Apply 30% fees -> $70 Net PnL and $30 to fund manager
4. New HWM -> $200 (Next fee triggers above $200)

In the gross HWM case, if the vault drops to $180 and then recovers to $190, no new fees would be charged despite $10 of new value creation, as it hasn’t exceeded the $200 gross HWM.

Request: update the HWM calculation to use net profits by tracking the value after performance fees are taken. This would more accurately reflect new value creation and align incentives better and Net NAV in general is the industry standard in TradFi.