Despite solid year-to-date performance, many hedge funds remain below their prior net asset values (NAVs), in many cases achieved during the first half of 2007.  As a technical matter, the governing documents of most hedge funds contain so-called high water mark or loss carry-forward provisions stating that the manager cannot collect a performance fee or allocation until the NAV of the fund exceeds its highest prior level.  But as a practical matter, the performance fee is a critical part of the hedge fund business model.  Among other things, performance fees enable managers to offer the compensation packages required to attract and retain top investment and other talent; and such talent is necessary to offer the incremental advantages in terms of insight and analysis that distinguish one hedge fund from another – that enable one fund to yield alpha while others just deliver beta or losses.  And hedge fund investors recognize this: by and large, they are invested in hedge funds for uncorrelated, absolute returns.  They’re not in hedge funds – at least primarily – to save money on fees.  (Fee saving is what bond and stock index funds are for.)  Investors want their managers incentivized, and thus investors have generally been willing to negotiate alternative arrangements with respect to performance fees or allocations with managers whose funds are below their high water marks.  In a sense, the experience of the past year and a half has demonstrated that high water mark provisions in hedge fund documents do not provide a roadmap for how the relationship between hedge fund managers and investors actually operates.  Rather, such provisions provide a starting position for negotiations between hedge fund managers and investors with respect to performance fees or allocations so long as a manager’s best days remain, at least for the moment, behind him or her.  This article explores what performance fees and allocations are (including a discussion of the tax purpose and effect of mini-master funds); how high water mark provisions affect a manager’s ability to collect such compensation; specific ways in which managers and investors are renegotiating performance fees or allocations in the “shadow” of high water mark provisions; the rationale among managers for seeking, and among investors for consenting to, such revised performance fee or allocation arrangements; and the process for obtaining consent to such revised arrangements, and the circumstances in which negative consent may be viable.