Carried Interest

AAA

DEFINITION of 'Carried Interest'

A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance.

INVESTOPEDIA EXPLAINS 'Carried Interest'

Traditionally, the amount of carried interest comes out to around 20-25% of the fund's annual profit. While all funds tend to have a small management fee, the management fee is meant to only cover the costs of managing the fund, with the exception of compensating the fund manager.

Carried interest is meant to serve as the primary source of income for the general partner. However, the general partner must ensure that all the initial capital that the limited partners contribute is returned along with some previously agreed upon rate of return.

RELATED TERMS
  1. Private Equity

    Equity capital that is not quoted on a public exchange. Private ...
  2. Performance-Based Compensation

    An incentive-based form of compensation that is reserved for ...
  3. Management Fee

    A charge levied by an investment manager for managing an investment ...
  4. Long-Term Incentive Plan - LTIP

    A reward system designed to improve employees' long-term performance ...
  5. Royalty

    A payment to an owner for the use of property, especially patents, ...
  6. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
RELATED FAQS
  1. Why is Manchester United (MANU) carrying so much debt?

    The takeover of Manchester United by the Glazer family beginning in 2005 saddled the historic club with substantial amounts ... Read Full Answer >>
  2. Who are Berkshire Hathaway's (BRK.A) main competitors?

    Led by renowned investor Warren Buffett, Berkshire Hathaway (BRK.A) is involved with multiple sectors of industry, facing ... Read Full Answer >>
  3. How does a company decide whether it wants to engage in a leveraged buyout of another ...

    A company may decide to undertake a leveraged buyout of another company if it believes it can reorganize the target company ... Read Full Answer >>
  4. What factors are most important to mezzanine financiers?

    Mezzanine financing is used as a bridge in capital funding between senior debt provided by conventional financial institutions ... Read Full Answer >>
  5. What are the advantages of hiring a third-party marketing company?

    Hiring a third-party marketing company's services offers a number of advantages for businesses - primarily savings, since ... Read Full Answer >>
  6. How does lower borrowing costs affect new airlines in the aerospace industry?

    Lower borrowing costs can help a new airline afford to obtain aircraft as well as pay for operating expenses such as salaries ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    How To Invest In Private Equity

    Private Equity might be a pricey investment, but returns are on the rise and the payoff could be big.
  2. Options & Futures

    A New Approach To Equity Compensation

    The new financial accounting standard known as FAS 123R could take a bite out of your portfolio. Find out why here.
  3. Options & Futures

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  4. Mutual Funds & ETFs

    Top Skills Hedge Funds Look For In Job Candidates

    Lucrative salary, high perks, and best quantitative brains at work. What are the top skills a candidate needs to get a job at a hedge fund?
  5. Mutual Funds & ETFs

    Why Hedge Fund Managers Make Good Advisory Clients

    Super-busy hedge fund managers should be viewed as an opportunity for sophisticated financial advisors who can step in and offer their services.
  6. Professionals

    A Look at How the Ultra-Wealthy Invest

    Ultra-wealthy investors are cautious this year as they approach the markets. Many target mutual funds and stocks, but most also diversify their portfolios.
  7. Professionals

    With Rates Low, Where Can Advisors Find Yield?

    There are many different options — both conventional and unconventional — available for financial advisors seeking yield and alpha for their clients.
  8. Professionals

    Due Diligence Tips for Investing in Alternatives

    Alternative investments can provide unique benefits to clients for whom they are suitable. But do your due diligence and beware of the risks.
  9. Mutual Funds & ETFs

    Top Bachelor Degree For A Hedgefund Career

    From economics to statistic analysis, certain bachelor's degrees make graduates more qualified for landing highly sought hedge fund jobs.
  10. Mutual Funds & ETFs

    10 Most Famous Hedge Fund Managers

    The most famous hedge fund managers have made billions, but their fame might not always result from their financial successes.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center