Hedge fund carried interest refers to the share of profits that fund managers receive as compensation for investment performance. This structure is commonly used in hedge funds and aligns the interests of managers with those of investors. Typically, carried interest is earned only after a fund surpasses a predefined performance threshold, often known as a hurdle rate.

The calculation of hedge fund carried interest is usually based on a percentage of net profits, rather than total assets under management. This approach incentivizes managers to focus on generating positive returns while managing risk. However, the structure and terms of carried interest can vary depending on fund agreements and regulatory considerations.

Hedge fund carried interest has been the subject of ongoing discussion, particularly in relation to taxation and financial regulation in the United States. Some view it as a performance-based reward that encourages skilled investment management, while others raise concerns about how it is taxed compared to ordinary income.

Understanding hedge fund carried interest is important for investors evaluating fund structures and compensation models. By examining how carried interest operates, stakeholders can better assess incentives, potential returns, and the broader financial implications within the hedge fund industry.