Carried interest is an important concept to understand in the realm of private equity, venture capital and hedge funds. Carried interest, or sometimes also referred to simply as "carry," is a share of profits from the investment of these funds and is paid as incentive compensation to the fund's general partner. The amount of this share can vary depending on the size and type of the fund, but it is generally designed to be a reward or re-investment for the success of the fund's managers.

To receive this incentive, the fund must meet a specified minimum return on investment. In most cases, the carried interest is considered a return on investment and is taxed as a capital gain, not as ordinary income. This is beneficial because capital gain tax rates are generally lower than the rates applied to ordinary income.

One of the most attractive aspects of carried interest is the fact that it rewards managers for long-term success. Carried interest is typically paid only after a certain number of years, meaning that the income associated with it is often deferred until the next tax year, allowing for compounding potential and potential for lower taxes.

The structure of carried interest provides a strong incentive for fund managers and investors to take calculated risks in hopes of achieving a healthy return in the long term. The compensation serves as an inducement to use the funds available to them in the most profitable fashion possible and hopefully, create a sustainable investment portfolio.

While carried interest can provide a great incentive, it also carries some risk. Because it depends on the success of the fund, should the fund perform poorly, the general partner of the fund would not receive a return, no matter how hard they worked on the investment.

Overall, carried interest is an important concept to understand when discussing private equity, venture capital and hedge funds. Not only does it provide incentive to the fund's managers to strive for long-term success, but it also offers a potentially beneficial tax rate. However, due to the long-term payout structure of carried interest, this share of profits can also be risky to those investing money with a fund. It is important to understand the risks and rewards associated with carried interest when evaluating a potential fund.