Carried interest, also known as carry, is a performance fee paid to investment managers in alternative investments, such as private equity and hedge funds. It is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership. The origin of carried interest can be traced back to the 16th century when European ships were crossing to Asia and the Americas, and the captain of the ship would take a 20% share of the profit from the carried goods to pay for the transport and the risk of sailing over oceans. Today, carried interest is used to name the compensation collected by investment executives in private equity funds.

The managers carried interest allocation varies depending on the type of investment fund and the demand for the fund from investors. In private equity, the standard carried interest allocation historically has been 20% for funds making buyout investments. Carried interest typically qualifies for treatment as a long-term capital gain taxed at a lower rate than ordinary income. However, the policy has been criticized as a way for the rich to pay less in taxes.

Carried interest is often only paid if the fund achieves a minimum return known as the hurdle rate. It serves as the primary source of compensation for the general partner, typically amounting to 20% of a funds returns. The general partner passes its gains through to the funds managers. Carried interest accounts for the "vast majority" of compensation paid to managing partners of private equity funds.

In the United States, carried interest is taxed at the same rate as long-term capital gains. While the management fee is taxed as ordinary income for the investment manager, taxation of carried interest can be deferred until profits are realized, and those profits are treated as investment income, thereby enjoying a lower tax rate. Proponents of carried interest argue that the investment strategies, expertise, and oversight provided by fund managers significantly bolster profits for a wide variety of investment vehicles and thus, carried interest should be considered investment income and taxed as such. Critics, however, argue that carried interest is compensation for a service and should, therefore, be taxed at the rate of ordinary income.