Forbes – Many hedge fund general partners have become exceptionally wealthy because of their investment capabilities coupled with the way hedge funds are typically compensated for success. However, by using various advanced planning strategies, it’s very possible for the hedge fund general partners to become considerably wealthier because they’ve legally avoided certain taxes.
Somewhat simplified: most hedge funds are set up where the founders are the general partners of the fund and own the management company. The management fee goes from the fund to the management company. Meanwhile, the carried interest goes from the fund to the general partners. This structure results in the founders being taxed on the management fee as ordinary income. The taxes on the carried interest can vary from ordinary income to capital gains. Moreover, there are a number of ways to defer and possibly eliminate paying taxes on the carried income.
