Hedge fund carried interest refers to a share of investment profits allocated to fund managers as performance-based compensation. It is typically calculated as a percentage of the gains generated for investors after meeting specific return thresholds. This structure is intended to align manager incentives with fund performance.

Hedge fund carried interest is usually earned over a defined period and may be subject to conditions such as high-water marks or hurdle rates. These mechanisms ensure that managers receive carried interest only after prior losses are recovered or minimum returns are achieved. The calculation often excludes management fees, focusing solely on net investment gains.

Tax treatment and regulatory discussions frequently surround hedge fund carried interest in the United States. Understanding its structure helps clarify how hedge fund compensation models function within broader investment frameworks.