HWM might be an incentive for high performance but is also an incentive for high risk. A very effective incentive for decent fund management is having "own skin in the game". If you get to live under the bridge, the manager will accompany you.
I'm not sure I agree with the comment about the High Water Mark. I will say it is a fair question to ask, "What percentage of the Fund is a direct investment of Management." There is your skin in the game.
what happens is if a fund falls well below HWM it just shuts down and starts up again thus resetting HWM. happens all the time
And what about hurdle rate? I think it should be mandatory. By the way, do you think HF or CTA's with 0/20 can survive? High fixed costs without 0% management fee adds more pressure...