CARRIED INTEREST
Back to GlossaryDefinition
A share of investment profits paid to fund managers as compensation, typically above a hurdle rate.
Summary
Carried interest is a performance-based compensation structure where fund managers (like private equity or hedge fund managers) receive a percentage of the profits they generate for investors, but only after meeting certain minimum return thresholds called hurdle rates. Think of it as a bonus system - managers get their regular management fees for running the fund, but they also get to 'carry' or share in a portion (typically 20%) of the investment gains above the hurdle rate. This aligns the managers' interests with investors since managers only get this extra compensation when they deliver strong returns.
Usage Context
Essential when studying alternative investments, fund structures, compensation models in asset management, and understanding alignment of interests between fund managers and investors
Common Confusions
- Thinking carried interest is guaranteed compensation rather than performance-based
- Confusing carried interest with management fees - they serve different purposes
- Assuming managers get carried interest immediately rather than after meeting hurdle rates
- Not understanding that carried interest comes from profits, not investor capital
