What is carried interest?

"Carried interest" is a form of remuneration in which fund managers receive a percentage of the profit without investing in the capital themselves. This serves as an incentive for fund managers to realise capital gains. The remuneration is linked to the financial performance of the fund: the higher the return, the higher the carried interest. This fee comes on top of the management fee charged by the fund manager.

Although this system encourages fund managers to make a profit, it can also lead to speculative behaviour, as the fund managers are rewarded for price increases without running a risk for price decreases. These are often substantial percentages, such as 20% of the profit, which is especially common in venture capital funds. Sometimes the first part of the profit is disregarded, for example at 5%, so that only the return above a certain threshold is considered true performance.