After a slow start to 2009, Silver Point Capital was up 13.6 percent for the year through June 30, 2009 in its offshore fund, according to a recent performance report obtained by Institutional Investor. Still, the $6.5 billion Greenwich, Connecticut-based hedge fund founded by two former Goldman Sachs partners is still below its high-water mark.

The term describes the provision in most hedge fund contracts meant to ensure that a manager isn’t collecting huge performance fees from a fund that has been losing money until those losses have been made back and the hedge fund is, effectively, above water again.

Silver Point is far from alone in posting gains while still falling short of a high-water mark. Citadel Investment Group, the Chicago-based $10.7 billion hedge fund founded by Kenneth Griffin, is up 44 percent in its main fund, Wellington, through the first six months of 2009. But the fund suffered a disastrous 2008, ending the year down 54.9 percent. In order to make investors whole, Wellington would need to return around 100 percent.

Despite being up 16.3 percent in its main fund so far this year, David Einhorn’s hedge fund, Greenlight Capital, also remains under water following a 22.7 percent drop in 2008.

Firms with funds under water cannot charge their usual performance fee, the 20 percent or so cut of investment returns that makes running a hedge fund so lucrative. Managers structure these high-water fees differently. For example, some hedge funds start charging performance fees again after 12 months regardless of whether the high-water mark has been passed.

Managers whose funds are under water have a variety of options. They can launch new funds, as Citadel and others have done, providing a performance-based revenue stream for the firm while older funds recover or are wound down, or they can issue new shares in the existing fund. These new shares would not fall under the existing high-water mark. Or, as Greenlight and New York-based $8.3 billion Perry Capital have done, they can renegotiate with investors so that, despite being under water, a fund still collects some kind of performance fee. Greenlight is currently charging a 10 percent performance fee for its underwater funds.

Some funds, however, already have their head above water. Stamford, Connecticut-based $14 billion SAC Capital Advisors is up approximately 20 percent for the first six months of this year, having ended 2008 down around 16 percent.

See also related story:

Greenlight CEO David Einhorn is Shorting Moody's