Does the high water mark take into account the returns in more than one previous year?
I would say yes, but in a practice exercise (with a year one 12% return, and second year -4%) they only use the -4% previous return.
Also in the book you can read that only say PRIOR NOT PREVIOUS
These fees may include maximum and high-water mark (or clawback) features that protect investors from situations such as paying for current positive performance before the negative effects of prior nderperformance have been offset.