Carried Interest

The term "carried interest" refers to a set of tax laws which allow managers of certain types of alternative investment funds (think: private equity, hedge funds, etc.) to receive their compensation classified as long-term gains for tax purposes instead of as ordinary income.

Carried interest (AKA, profit participation on investment gains) is the primary wealth creator in these investment vehicles. Because the general partners invest their own money alongside the limited partners, attribution is made such that these funds are essentially matched and multiplied by investment returns. This way, the overall distributions going back to the general partners get the better tax treatment.

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