The term carried interest refers to the amount of carried interest a fund manager or hedge fund manager receives on the overall performance of an investment.
Regardless of whether or not they have contributed to the initial investment – carried interest acts as compensation for a fund manager to help motivate them to ensure constant enhancement of selected funds.
All fund managers are subject to a 20% tax rate on the returns they generate from initial profits from investors. Although the investor is subject to different taxation i.e. capital-gains tax, or perhaps income tax, which is set at 37% in the United States, fund managers still pay a lot less than ordinary income taxpayers.
Every investor or fund manager will set certain targets for their initial investments. A real-world example will constitute that investments will first need to reach a minimum of 7-8% return on investment before carried interest can be paid out to the fund manager.
This is dependent on each scenario, as various fund managers will set up an agreement that meets both their needs and that of the investor.
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