Performance Fee / Carried Interest — Recognition When High-Water Mark Exceeded

💡 Accountant's Note

Performance fees (20% of profits above a hurdle rate for hedge funds; 20% carry above an 8% preferred return for private equity) are the most economically significant but most recognition-constrained element of investment manager revenue. Under ASC 606, performance fees are subject to the CONSTRAINT on variable consideration — they cannot be recognized until it is probable that a significant revenue reversal will not occur. For hedge funds with annual crystallization dates: the performance fee is recognized when it crystallizes (at the end of the performance period, typically December 31), because market movements could reverse it before then. For private equity carry: recognition typically occurs when the carry is distributed (or when the carry is beyond reversal given the portfolio's realized returns). The '20-2' hedge fund model (2% management fee + 20% performance fee) means performance fees can dwarf management fees in strong market years.