Hedge fund carried interest refers to a share of profits that investment managers receive as compensation for managing pooled investment funds. It is typically calculated as a percentage of the fund’s gains, often after achieving a predefined performance threshold. This structure is designed to align the interests of fund managers with those of investors by rewarding performance rather than asset size alone.

In practice, hedge fund carried interest is earned only when investments generate positive returns over time. Losses may need to be recovered before carried interest is paid, a concept commonly known as a “high-water mark.” This mechanism helps ensure that managers are compensated for sustained performance rather than short-term gains.

Hedge fund carried interest has been the subject of ongoing discussion in the United States, particularly regarding its tax treatment. Under certain conditions, it may be taxed at capital gains rates rather than ordinary income rates, which has led to policy debates about fairness and economic impact. Supporters argue that carried interest reflects investment risk and long-term capital commitment, while critics view it as preferential tax treatment.

Overall, hedge fund carried interest remains a central feature of hedge fund compensation structures, influencing investment strategies, manager incentives, and regulatory discussions within the financial sector.