The article is wrong. See the other comment about High Water Mark. Long-term the fund only takes the profit on the total return.

The problem with the high water mark is there's then an incentive for managers of deep underwater funds to close them and open new ones.

That's an incentive of any business owner that loses money. It's the duty of investors to review the managers reputation and not give money to known "fraudsters" (unless they can negotiate an incentive structure to prevent such problems).

How so? If you're running a widget factory, you can't just close it and open again with the same machines and staff under a new name. Your investors would have good reason to sue you. And in any case you're not paid a proportion of your shareholder's returns.

With a fund, which is a separate vehicle advised by a management company, the fund can be closed with the knowledge (typically code, and who is gonna know if you take that?) kept and used to run another fund.

And it needn't be terribly blatant. If a guy has a reputation as a stock picker, he can do something like open a new fund for another geography or sector.

Investors can be strangely loyal, too.

> you can't just close it and open again

Actually, you can if you declare bankruptcy.

You just pick up the factory, set it up in a different part of the world, and start it up again?

You don't even have to move it. You can set up a pre-pack insolvency, then buy up the business - assets, employees, stock, everything - in a new company and just keep going, but without the debt. There have been some scandals about business owners doing this, but I don't think it's been entirely effectively stopped.