1. What is Carried Interest?

Carried interest, or "carry," is the share of profits that investment managers receive as compensation, typically 20% of the fund's profits above a specified hurdle rate or high water mark.

2. How Does the Calculator Work?

The calculator uses the carry formula:

Where:

• \( Performance \) — Current value of the investment (USD)
• \( HWM \) — High water mark, the highest value the investment has previously reached (USD)
• \( 20\% \) — Typical carried interest percentage

Explanation: The calculation ensures managers only receive carry on profits above the previous peak value, aligning interests with investors.

3. Importance of High Water Mark

Details: The high water mark prevents managers from earning carried interest on the same gains multiple times, ensuring they only profit from new highs.

4. Using the Calculator

Tips: Enter current performance and high water mark values in USD. Both values must be positive numbers, with performance typically higher than HWM for positive carry.

5. Frequently Asked Questions (FAQ)

Q1: Why is 20% the standard carry percentage?
A: 20% has become industry standard in private equity and hedge funds as it balances manager incentives with investor returns.

Q2: What if performance is below the high water mark?
A: No carry is earned until performance exceeds the HWM again (known as the "hurdle").

Q3: Are there variations to this calculation?
A: Some funds use hurdle rates (minimum returns) before carry kicks in, or tiered carry percentages.

Q4: How often is carry typically calculated?
A: Usually at fund liquidation, but sometimes annually or quarterly depending on fund terms.

Q5: Is carried interest taxed differently?
A: In many jurisdictions, carried interest receives capital gains treatment rather than ordinary income treatment.