tax treatment, but IMO, if a partner invests $1M in a fund, and the fund increases in value by 50%, their $500K gain from that investment should receive normal long term capital gains treatment if held for more than a year. The $10m they earn from the "success fee" for generating a return above some threshold or benchmark is clearly an incentive payment and should be treated as ordinary income. My son's best friend's dad is a hedge fund guy. He probably pulls down $50 million in a off year. It pisses me off that his tax rate is lower than mine.